Appendix B to Part 38 - Guidance on, and Acceptable Practices in, Compliance With Core Principles
17:1.0.1.1.31.26.7.1.32 : Appendix B
Appendix B to Part 38 - Guidance on, and Acceptable Practices in,
Compliance With Core Principles
1. This appendix provides guidance on complying with core
principles, both initially and on an ongoing basis, to obtain and
maintain designation under section 5(d) of the Act and this part
38. Where provided, guidance is set forth in paragraph (a)
following the relevant heading and can be used to demonstrate to
the Commission compliance with the selected requirements of a core
principle, under §§ 38.3 and 38.5 of this part. The guidance for
the core principle is illustrative only of the types of matters a
designated contract market may address, as applicable, and is not
intended to be used as a mandatory checklist. Addressing the issues
set forth in this appendix would help the Commission in its
consideration of whether the designated contract market is in
compliance with the selected requirements of a core principle;
provided however, that the guidance is not intended to diminish or
replace, in any event, the obligations and requirements of
applicants and designated contract markets to comply with the
regulations provided under this part.
2. Where provided, acceptable practices meeting selected
requirements of core principles are set forth in paragraph (b)
following guidance. Designated contract markets that follow
specific practices outlined in the acceptable practices for a core
principle in this appendix will meet the selected requirements of
the applicable core principle; provided however, that the
acceptable practice is not intended to diminish or replace, in any
event, the obligations and requirements of applicants and
designated contract markets to comply with the regulations provided
under this part 38. The acceptable practices are for illustrative
purposes only and do not state the exclusive means for satisfying a
core principle.
Core Principle 1 of section 5(d) of the Act: DESIGNATION
AS CONTRACT MARKET. - (A) IN GENERAL. - To be designated, and
maintain a designation, as a contract market, a board of trade
shall comply with -
(i) Any core principle described in this subsection; and
(ii) Any requirement that the Commission may impose by rule or
regulation pursuant to section 8a(5).
(B) REASONABLE DISCRETION OF CONTRACT MARKET. - Unless otherwise
determined by the Commission by rule or regulation, a board of
trade described in subparagraph (A) shall have reasonable
discretion in establishing the manner in which the board of trade
complies with the core principles described in this subsection.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 2 of section 5(d) of the Act: COMPLIANCE
WITH RULES - (A) IN GENERAL. - The board of trade shall establish,
monitor, and enforce compliance with the rules of the contract
market, including -
(i) Access requirements;
(ii) The terms and conditions of any contracts to be traded on
the contract market; and
(iii) Rules prohibiting abusive trade practices on the contract
market.
(B) CAPACITY OF CONTRACT MARKET. - The board of trade shall have
the capacity to detect, investigate, and apply appropriate
sanctions to any person that violates any rule of the contract
market.
(C) REQUIREMENT OF RULES. - The rules of the contract market
shall provide the board of trade with the ability and authority to
obtain any necessary information to perform any function described
in this subsection, including the capacity to carry out such
international information-sharing agreements as the Commission may
require.
(a) Guidance - (1) Investigations and investigation
reports - Warning letters. The rules of a designated contract
market may authorize compliance staff to issue a warning letter to
a person or entity under investigation or to recommend that a
disciplinary panel take such an action.
(2) Additional rules required. A designated contract
market should adopt and enforce any additional rules that it
believes are necessary to comply with the requirements of subpart C
of this chapter
(b) Acceptable Practices. [Reserved]
Core Principle 3 of section 5(d) of the Act: CONTRACTS
NOT READILY SUBJECT TO MANIPULATION. - The board of trade shall
list on the contract market only contracts that are not readily
susceptible to manipulation.
(a) Guidance. (1) Designated contract markets may list
new products for trading by self-certification under § 40.2 of this
chapter or may submit products for Commission approval under § 40.3
of this chapter.
(2) Guidance in appendix C to this part may be used as guidance
in meeting this core principle for both new products listings and
existing listed contracts.
(b) Acceptable Practices. [Reserved]
Core Principle 4 of section 5(d) of the Act: PREVENTION
OF MARKET DISRUPTION. - The board of trade shall have the capacity
and responsibility to prevent manipulation, price distortion, and
disruptions of the delivery or cash-settlement process through
market surveillance, compliance, and enforcement practices and
procedures, including -
(A) Methods for conducting real-time monitoring of trading;
and
(B) Comprehensive and accurate trade reconstructions.
(a) Guidance. The detection and prevention of market
manipulation, disruptions, and distortions should be incorporated
into the design of programs for monitoring trading activity.
Monitoring of intraday trading should include the capacity to
detect developing market anomalies, including abnormal price
movements and unusual trading volumes, and position-limit
violations. The designated contract market should have rules in
place that allow it broad powers to intervene to prevent or reduce
market disruptions. Once a threatened or actual disruption is
detected, the designated contract market should take steps to
prevent the disruption or reduce its severity.
(2) Additional rules required. A designated contract
market should adopt and enforce any additional rules that it
believes are necessary to comply with the requirements of subpart E
of this part.
(b) Acceptable Practices - (1) General
Requirements. Real-time monitoring for market anomalies and
position-limit violations are the most effective, but the
designated contract market may also demonstrate that it has an
acceptable program if some of the monitoring is accomplished on a
T+1 basis. An acceptable program must include automated trading
alerts to detect market anomalies and position-limit violations as
they develop and before market disruptions occur or become more
serious. In some cases, a designated contract market may
demonstrate that its manual processes are effective.
(2) Physical-delivery contracts. For physical-delivery
contracts, the designated contract market must demonstrate that it
is monitoring the adequacy and availability of the deliverable
supply, which, if such information is available, includes the size
and ownership of those supplies and whether such supplies are
likely to be available to short traders and saleable by long
traders at the market value of those supplies under normal cash
marketing conditions. Further, for physical-delivery contracts, the
designated contract market must continually monitor the
appropriateness of a contract's terms and conditions, including the
delivery instrument, the delivery locations and location
differentials, and the commodity characteristics and related
differentials. The designated contract market must demonstrate that
it is making a good-faith effort to resolve conditions that are
interfering with convergence of its physical-delivery contract to
the price of the underlying commodity or causing price distortions
or market disruptions, including, when appropriate, changes to
contract terms.
(3) Cash-settled contracts. At a minimum, an acceptable
program for monitoring cash-settled contracts must include access,
either directly or through an information-sharing agreement, to
traders' positions and transactions in the reference market for
traders of a significant size in the designated contract market
near the settlement of the contract.
(4) Ability to obtain information. With respect to the
designated contract market's ability to obtain information, a
designated contract market may limit the application of the
requirement to keep and provide such records only to those that are
reportable under its large-trader reporting system or otherwise
hold substantial positions.
(5) Risk controls for trading. An acceptable program for
preventing market disruptions must demonstrate appropriate trade
risk controls, in addition to pauses and halts. Such controls must
be adapted to the unique characteristics of the markets to which
they apply and must be designed to avoid market disruptions without
unduly interfering with that market's price discovery function. The
designated contract market may choose from among controls that
include: pre-trade limits on order size, price collars or bands
around the current price, message throttles, and daily price
limits, or design other types of controls. Within the specific
array of controls that are selected, the designated contract market
also must set the parameters for those controls, so long as the
types of controls and their specific parameters are reasonably
likely to serve the purpose of preventing market disruptions and
price distortions. If a contract is linked to, or is a substitute
for, other contracts, either listed on its market or on other
trading venues, the designated contract market must, to the extent
practicable, coordinate its risk controls with any similar controls
placed on those other contracts. If a contract is based on the
price of an equity security or the level of an equity index, such
risk controls must, to the extent practicable, be coordinated with
any similar controls placed on national security exchanges.
(6) Market disruptions and system anomalies associated with
electronic trading. To comply with § 38.251(e), the contract
market must adopt and implement rules that are reasonably designed
to prevent, detect, and mitigate market disruptions or system
anomalies associated with electronic trading. To comply with §
38.251(f), the contract market must subject all electronic orders
to exchange-based pre-trade risk controls that are reasonably
designed to prevent, detect, and mitigate market disruptions or
system anomalies.
Core Principle 5 of section 5(d) of the Act: POSITION
LIMITATIONS OR ACCOUNTABILITY - (A) IN GENERAL. - To reduce the
potential threat of market manipulation or congestion (especially
during trading in the delivery month), the board of trade shall
adopt for each contract of the board of trade, as is necessary and
appropriate, position limitations or position accountability for
speculators.
(B) MAXIMUM ALLOWABLE POSITION LIMITATION. - For any contract
that is subject to a position limitation established by the
Commission pursuant to section 4a(a), the board of trade shall set
the position limitation of the board of trade at a level not higher
than the position limitation established by the Commission.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 6 of section 5(d) of the Act: EMERGENCY
AUTHORITY - The board of trade, in consultation or cooperation with
the Commission, shall adopt rules to provide for the exercise of
emergency authority, as is necessary and appropriate, including the
authority -
(A) To liquidate or transfer open positions in any contract;
(B) To suspend or curtail trading in any contract; and
(C) To require market participants in any contract to meet
special margin requirements.
(a) Guidance. In consultation and cooperation with the
Commission, a designated contract market should have the authority
to intervene as necessary to maintain markets with fair and orderly
trading and to prevent or address manipulation or disruptive
trading practices, whether the need for intervention arises
exclusively from the DCM's market or as part of a coordinated,
cross-market intervention. DCM rules should include procedures and
guidelines to avoid conflicts of interest in accordance with the
provisions of § 40.9 of this chapter, and include alternate lines
of communication and approval procedures to address emergencies
associated with real-time events. To address perceived market
threats, the designated contract market should have rules that
allow it to take certain actions in the event of an emergency, as
defined in § 40.1(h) of this chapter, including: imposing or
modifying position limits, price limits, and intraday market
restrictions; imposing special margin requirements; ordering the
liquidation or transfer of open positions in any contract; ordering
the fixing of a settlement price; extending or shortening the
expiration date or the trading hours; suspending or curtailing
trading in any contract; transferring customer contracts and the
margin or altering any contract's settlement terms or conditions;
and, where applicable, providing for the carrying out of such
actions through its agreements with its third-party provider of
clearing or regulatory services. In situations where a contract is
fungible with a contract on another platform, emergency action to
liquidate or transfer open interest must be as directed, or agreed
to, by the Commission or the Commission's staff. The DCM has the
authority to independently respond to emergencies in an effective
and timely manner consistent with the nature of the emergency, as
long as all such actions taken by the DCM are made in good faith to
protect the integrity of the markets. The Commission should be
notified promptly of the DCM's exercise of emergency action,
explaining how conflicts of interest were minimized, including the
extent to which the DCM considered the effect of its emergency
action on the underlying markets and on markets that are linked or
referenced to the contract market and similar markets on other
trading venues. Information on all regulatory actions carried out
pursuant to a DCM's emergency authority should be included in a
timely submission of a certified rule pursuant to part 40 of this
chapter.
(b) Acceptable Practices. A designated contract market
must have procedures and guidelines for decision-making and
implementation of emergency intervention in the market. At a
minimum, the DCM must have the authority to liquidate or transfer
open positions in the market, suspend or curtail trading in any
contract, and require market participants in any contract to meet
special margin requirements. In situations where a contract is
fungible with a contract on another platform, emergency action to
liquidate or transfer open interest must be directed, or agreed to,
by the Commission or the Commission's staff. The DCM must promptly
notify the Commission of the exercise of its emergency authority,
documenting its decision-making process, including how conflicts of
interest were minimized, and the reasons for using its emergency
authority. The DCM must also have rules that allow it to take such
market actions as may be directed by the Commission.
Core Principle 7 of section 5(d) of the Act: AVAILABILITY
OF GENERAL INFORMATION. - The board of trade shall make available
to market authorities, market participants, and the public accurate
information concerning -
(A) The terms and conditions of the contracts of the contract
market; and
(B)(i) The rules, regulations, and mechanisms for executing
transactions on or through the facilities of the contract market;
and
(ii) The rules and specifications describing the operation of
the contract market's -
(I) Electronic matching platform; or
(II) Trade execution facility.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 8 of section 5(d) of the Act: DAILY
PUBLICATION OF TRADING INFORMATION. - The board of trade shall make
public daily information on settlement prices, volume, open
interest, and opening and closing ranges for actively traded
contracts on the contract market.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 9 of section 5(d) of the Act: EXECUTION OF
TRANSACTIONS. - “(A) IN GENERAL. - The board of trade shall provide
a competitive, open, and efficient market and mechanism for
executing transactions that protects the price discovery process of
trading in the centralized market of the board of trade.
(B) RULES. - The rules of the board of trade may authorize, for
bona fide business purposes -
(i) Transfer trades or office trades;
(ii) An exchange of -
(I) Futures in connection with a cash commodity transaction;
(II) Futures for cash commodities; or
(III) Futures for swaps; or
(iii) A futures commission merchant, acting as principal or
agent, to enter into or confirm the execution of a contract for the
purchase or sale of a commodity for future delivery if the contract
is reported, recorded, or cleared in accordance with the rules of
the contract market or a derivatives clearing organization.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 10 of section 5(d) of the Act: TRADE
INFORMATION. - The board of trade shall maintain rules and
procedures to provide for the recording and safe storage of all
identifying trade information in a manner that enables the contract
market to use the information -
(A) To assist in the prevention of customer and market abuses;
and
(B) To provide evidence of any violations of the rules of the
contract market.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 11 of section 5(d) of the Act: FINANCIAL
INTEGRITY OF TRANSACTIONS. - The board of trade shall establish and
enforce -
(A) Rules and procedures for ensuring the financial integrity of
transactions entered into on or through the facilities of the
contract market (including the clearance and settlement of the
transactions with a derivatives clearing organization); and
(B) Rules to ensure -
(i) The financial integrity of any -
(I) Futures commission merchant; and
(II) Introducing broker; and
(ii) The protection of customer funds.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 12 of section 5(d) of the Act: PROTECTION
OF MARKETS AND MARKET PARTICIPANTS - The board of trade shall
establish and enforce rules -
(A) To protect markets and market participants from abusive
practices committed by any party, including abusive practices
committed by a party acting as an agent for a participant; and
(B) To promote fair and equitable trading on the contract
market.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 13 of section 5(d) of the Act:
DISCIPLINARY PROCEDURES. - The board of trade shall establish and
enforce disciplinary procedures that authorize the board of trade
to discipline, suspend, or expel members or market participants
that violate the rules of the board of trade, or similar methods
for performing the same functions, including delegation of the
functions to third parties.
(a) Guidance - (1) Notice of charges. If the rules
of the designated contract market so provide, a notice may also
advise: (i) That failure to request a hearing within the period
prescribed in the notice, except for good cause, may be deemed a
waiver of the right to a hearing; and (ii) That failure to answer
or to deny expressly a charge may be deemed to be an admission of
such charge.
(2) Admission or failure to deny charges. The rules of a
designated contract market may provide that if a respondent admits
or fails to deny any of the charges, a disciplinary panel may find
that the violations alleged in the notice of charges for which the
respondent admitted or failed to deny any of the charges have been
committed. If the designated contract market's rules so provide,
then:
(i) The disciplinary panel should impose a sanction for each
violation found to have been committed;
(ii) The disciplinary panel should promptly notify the
respondent in writing of any sanction to be imposed pursuant to
paragraph (2)(i) of this section and shall advise the respondent
that it may request a hearing on such sanction within the period of
time, which shall be stated in the notice;
(iii) The rules of a designated contract market may provide that
if a respondent fails to request a hearing within the period of
time stated in the notice, the respondent will be deemed to have
accepted the sanction.
(3) Settlement offers. (i) The rules of a designated
contract market may permit a respondent to submit a written offer
of settlement at any time after an investigation report is
completed. The disciplinary panel presiding over the matter may
accept the offer of settlement, but may not alter the terms of a
settlement offer unless the respondent agrees.
(ii) The rules of a designated contract market may provide that,
in its discretion, a disciplinary panel may permit the respondent
to accept a sanction without either admitting or denying the rule
violations upon which the sanction is based.
(iii) If an offer of settlement is accepted, the panel accepting
the offer should issue a written decision specifying the rule
violations it has reason to believe were committed, including the
basis or reasons for the panel's conclusions, and any sanction to
be imposed, which should include full customer restitution where
customer harm is demonstrated, except where the amount of
restitution and to whom it should be provided cannot be reasonably
determined. If an offer of settlement is accepted without the
agreement of the enforcement staff, the decision should adequately
support the disciplinary panel's acceptance of the settlement.
Where applicable, the decision should also include a statement that
the respondent has accepted the sanctions imposed without either
admitting or denying the rule violations.
(iv) The respondent may withdraw his or her offer of settlement
at any time before final acceptance by a disciplinary panel. If an
offer is withdrawn after submission, or is rejected by a
disciplinary panel, the respondent should not be deemed to have
made any admissions by reason of the offer of settlement and should
not be otherwise prejudiced by having submitted the offer of
settlement.
(4) Hearings. The rules of a designated contract market
may provide that a sanction may be summarily imposed upon any
person within its jurisdiction whose actions impede the progress of
a hearing.
(5) Right to appeal. The rules of a designated contract
market may permit the parties to a proceeding to appeal promptly an
adverse decision of a disciplinary panel in all or in certain
classes of cases. Such rules may require a party's notice of appeal
to be in writing and to specify the findings, conclusions, or
sanctions to which objection are taken. If the rules of a
designated contract market permit appeals, then both the respondent
and the enforcement staff should have the opportunity to appeal and
the designated contract market should provide for the
following:
(i) The designated contract market should establish an appellate
panel that should be authorized to hear appeals of respondents. In
addition, the rules of a designated contract market may provide
that the appellate panel may, on its own initiative, order review
of a decision by a disciplinary panel within a reasonable period of
time after the decision has been rendered.
(ii) The composition of the appellate panel should be consistent
with the requirements set forth in part 40 of this chapter and
paragraph (4) of the acceptable practices for Core Principle 16,
and should not include any members of the designated contract
market's compliance staff, or any person involved in adjudicating
any other stage of the same proceeding. The rules of a designated
contract market should provide for the appeal proceeding to be
conducted before all of the members of the appellate panel or a
panel thereof.
(iii) Except for good cause shown, the appeal or review should
be conducted solely on the record before the disciplinary panel,
the written exceptions filed by the parties, and the oral or
written arguments of the parties.
(iv) Promptly following the appeal or review proceeding, the
appellate panel should issue a written decision and should provide
a copy to the respondent. The decision issued by the appellate
panel should adhere to all the requirements of § 38.708 of this
part, to the extent that a different conclusion is reached from
that issued by the disciplinary panel.
(6) Summary fines for violations of rules regarding timely
submission of records, decorum, or other similar activities. A
designated contract market may adopt a summary fine schedule for
violations of rules relating to the timely submission of accurate
records required for clearing or verifying each day's transactions,
decorum, attire, or other similar activities. A designated contract
market may permit its compliance staff, or a designated panel of
contract market officials, to summarily impose minor sanctions
against persons within the designated contract market's
jurisdiction for violating such rules. A designated contract
market's summary fine schedule may allow for warning letters to be
issued for first-time violations or violators. If adopted, a
summary fine schedule should provide for progressively larger fines
for recurring violations.
(7) Emergency disciplinary actions. (i) A designated
contract market may impose a sanction, including suspension, or
take other summary action against a person or entity subject to its
jurisdiction upon a reasonable belief that such immediate action is
necessary to protect the best interest of the marketplace.
(ii) Any emergency disciplinary action should be taken in
accordance with a designated contract market's procedures that
provide for the following:
(A) If practicable, a respondent should be served with a notice
before the action is taken, or otherwise at the earliest possible
opportunity. The notice should state the action, briefly state the
reasons for the action, and state the effective time and date, and
the duration of the action.
(B) The respondent should have the right to be represented by
legal counsel or any other representative of its choosing in all
proceedings subsequent to the emergency action taken. The
respondent should be given the opportunity for a hearing as soon as
reasonably practicable and the hearing should be conducted before
the disciplinary panel pursuant to the requirements of § 38.707 of
this part.
(C) Promptly following the hearing provided for in this rule,
the designated contract market should render a written decision
based upon the weight of the evidence contained in the record of
the proceeding and should provide a copy to the respondent. The
decision should include a description of the summary action taken;
the reasons for the summary action; a summary of the evidence
produced at the hearing; a statement of findings and conclusions; a
determination that the summary action should be affirmed, modified,
or reversed; and a declaration of any action to be taken pursuant
to the determination, and the effective date and duration of such
action.
(b) Acceptable Practices. [Reserved]
Core Principle 14 of section 5(d) of the Act: DISPUTE
RESOLUTION. - The board of trade shall establish and enforce rules
regarding, and provide facilities for alternative dispute
resolution as appropriate for, market participants and any market
intermediaries.
(a) Guidance. A designated contract market should provide
customer dispute resolution procedures that are: appropriate to the
nature of the market; fair and equitable; and available on a
voluntary basis, either directly or through another self-regulatory
organization, to customers that are non-eligible contract
participants.
(b) Acceptable Practices. (1) Fair and equitable
procedure. Every contract market shall provide customer dispute
resolution procedures that are fair and equitable. An acceptable
customer dispute resolution mechanism would:
(i) Provide the customer with an opportunity to have his or her
claim decided by an objective and impartial decisionmaker;
(ii) Provide each party with the right to be represented by
counsel at the commencement of the procedure, at the party's own
expense;
(iii) Provide each party with adequate notice of the claims
presented against such party, an opportunity to be heard on all
claims, defenses and permitted counterclaims, and an opportunity
for a prompt hearing;
(iv) Authorize prompt, written, final settlement awards that are
not subject to appeal within the designated contract market;
and
(v) Notify the parties of the fees and costs that may be
assessed.
(2) Voluntary Procedures. The use of dispute settlement
procedures shall be voluntary for customers other than eligible
contract participants as defined in section 1a(18) of the
Dodd-Frank Act, and may permit counterclaims as provided in § 166.5
of this chapter.
(3) Member-to-Member Procedures. If the designated
contract market also provides procedures for the resolution of
disputes that do not involve customers (i.e.,
member-to-member disputes), the procedures for resolving such
disputes must be independent of and shall not interfere with or
delay the resolution of customers' claims or grievances.
(4) Delegation. A designated contract market may delegate
to another self-regulatory organization or to a registered futures
association its responsibility to provide for customer dispute
resolution mechanisms, provided, however, that in the event of such
delegation, the designated contract market shall in all respects
treat any decision issued by such other organization or association
with respect to such dispute as if the decision were its own,
including providing for the appropriate enforcement of any award
issued against a delinquent member.
Core Principle 15 of section 5(d) of the Act: GOVERNANCE
FITNESS STANDARDS. - The board of trade shall establish and enforce
appropriate fitness standards for directors, members of any
disciplinary committee, members of the contract market, and any
other person with direct access to the facility (including any
party affiliated with any person described in this paragraph).
(a) Guidance. (1) A designated contract market should
have appropriate eligibility criteria for the categories of persons
set forth in the Core Principle that should include standards for
fitness and for the collection and verification of information
supporting compliance with such standards. Minimum standards of
fitness for persons who have member voting privileges, governing
obligations or responsibilities, or who exercise disciplinary
authority are those bases for refusal to register a person under
section 8a(2) of the Act. In addition, persons who have governing
obligations or responsibilities, or who exercise disciplinary
authority, should not have a significant history of serious
disciplinary offenses, such as those that would be disqualifying
under § 1.63 of this chapter. Members with trading privileges but
having no, or only nominal, equity, in the facility and non-member
market participants who are not intermediated and do not have these
privileges, obligations, responsibilities or disciplinary authority
could satisfy minimum fitness standards by meeting the standards
that they must meet to qualify as a “market participant.” Natural
persons who directly or indirectly have greater than a ten percent
ownership interest in a designated contract market should meet the
fitness standards applicable to members with voting rights.
(2) The Commission believes that such standards should include
providing the Commission with fitness information for such persons,
whether registration information, certification to the fitness of
such persons, an affidavit of such persons' fitness by the contract
market's counsel or other information substantiating the fitness of
such persons. If a contract market provides certification of the
fitness of such a person, the Commission believes that such
certification should be based on verified information that the
person is fit to be in his or her position.
(b) Applicable Practices. [Reserved]
Core Principle 16 of section 5(d) of the Act: CONFLICTS
OF INTEREST. - The board of trade shall establish and enforce rules
-
(A) to minimize conflicts of interest in the decisionmaking
process of the contract market; and
(B) to establish a process for resolving conflicts of interest
described in subparagraph (A).
(a) Guidance. The means to address conflicts of interest
in decisionmaking of a contract market should include methods to
ascertain the presence of conflicts of interest and to make
decisions in the event of such a conflict. In addition, the
Commission believes that the contract market should provide for
appropriate limitations on the use or disclosure of material
non-public information gained through the performance of official
duties by board members, committee members and contract market
employees or gained through an ownership interest in the contract
market.
(b) Acceptable Practices. All designated contract markets
(“DCMs” or “contract markets”) bear special responsibility to
regulate effectively, impartially, and with due consideration of
the public interest, as provided for in section 3 of the Act. Under
Core Principle 15, they are also required to minimize conflicts of
interest in their decisionmaking processes. To comply with this
Core Principle, contract markets should be particularly vigilant
for such conflicts between and among any of their self-regulatory
responsibilities, their commercial interests, and the several
interests of their management, members, owners, customers and
market participants, other industry participants, and other
constituencies. Acceptable practices for minimizing conflicts of
interest shall include the following elements:
(1) Board composition for contract markets
(i) At least thirty-five percent of the directors on a contract
market's board of directors shall be public directors; and
(ii) The executive committees (or similarly empowered bodies)
shall be at least thirty-five percent public.
(2) Public director
(i) To qualify as a public director of a contract market, an
individual must first be found, by the board of directors, on the
record, to have no material relationship with the contract market.
A “material relationship” is one that reasonably could affect the
independent judgment or decisionmaking of the director.
(ii) In addition, a director shall be considered to have a
“material relationship” with the contract market if any of the
following circumstances exist:
(A) The director is an officer or employee of the contract
market or an officer or employee of its affiliate. In this context,
“affiliate” includes parents or subsidiaries of the contract market
or entities that share a common parent with the contract
market;
(B) The director is a member of the contract market, or an
officer or director of a member. “Member” is defined according to
section 1a(34) of the Commodity Exchange Act and Commission
Regulation 1.3;
(C) The director, or a firm with which the director is an
officer, director, or partner, receives more than $100,000 in
combined annual payments from the contract market, or any affiliate
of the contract market (as defined in subsection (2)(ii)(A)), for
legal, accounting, or consulting services. Compensation for
services as a director of the contract market or as a director of
an affiliate of the contract market does not count toward the
$100,000 payment limit, nor does deferred compensation for services
prior to becoming a director, so long as such compensation is in no
way contingent, conditioned, or revocable;
(D) Any of the relationships above apply to a member of the
director's “immediate family,” i.e., spouse, parents, children and
siblings.
(iii) All of the disqualifying circumstances described in
subsection (2)(ii) shall be subject to a one-year look back.
(iv) A contract market's public directors may also serve as
directors of the contract market's affiliate (as defined in
subsection (2)(ii)(A)) if they otherwise meet the definition of
public director in this section (2).
(v) A contract market shall disclose to the Commission which
members of its board are public directors, and the basis for those
determinations.
(3) Regulatory oversight committee
(i) A board of directors of any contract market shall establish
a Regulatory Oversight Committee (“ROC”) as a standing committee,
consisting of only public directors as defined in section (2), to
assist it in minimizing actual and potential conflicts of interest.
The ROC shall oversee the contract market's regulatory program on
behalf of the board. The board shall delegate sufficient authority,
dedicate sufficient resources, and allow sufficient time for the
ROC to fulfill its mandate.
(ii) The ROC shall:
(A) Monitor the contract market's regulatory program for
sufficiency, effectiveness, and independence;
(B) Oversee all facets of the program, including trade practice
and market surveillance; audits, examinations, and other regulatory
responsibilities with respect to member firms (including ensuring
compliance with financial integrity, financial reporting, sales
practice, recordkeeping, and other requirements); and the conduct
of investigations;
(C) Review the size and allocation of the regulatory budget and
resources; and the number, hiring and termination, and compensation
of regulatory personnel;
(D) Supervise the contract market's chief regulatory officer,
who will report directly to the ROC;
(E) Prepare an annual report assessing the contract market's
self-regulatory program for the board of directors and the
Commission, which sets forth the regulatory program's expenses,
describes its staffing and structure, catalogues disciplinary
actions taken during the year, and reviews the performance of
disciplinary committees and panels;
(F) Recommend changes that would ensure fair, vigorous, and
effective regulation; and
(G) Review regulatory proposals and advise the board as to
whether and how such changes may impact regulation.
(4) Disciplinary panels
All contract markets shall minimize conflicts of interest in
their disciplinary processes through disciplinary panel composition
rules that preclude any group or class of industry participants
from dominating or exercising disproportionate influence on such
panels. Contract markets can further minimize conflicts of interest
by including in all disciplinary panels at least one person who
would qualify as a public director, as defined in subsections
(2)(ii) and (2)(iii) above, except in cases limited to decorum,
attire, or the timely submission of accurate records required for
clearing or verifying each day's transactions. If contract market
rules provide for appeal to the board of directors, or to a
committee of the board, then that appellate body shall also include
at least one person who would qualify as a public director as
defined in subsections (2)(ii) and (2)(iii) above.
Core Principle 17 of section 5(d) of the Act: COMPOSITION
OF GOVERNING BOARDS OF CONTRACT MARKETS. - The governance
arrangements of the board of trade shall be designed to permit
consideration of the views of market participants.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 18 of section 5(d) of the Act:
RECORDKEEPING. - The board of trade shall maintain records of all
activities relating to the business of the contract market -
(A) In a form and manner that is acceptable to the Commission;
and
(B) For a period of at least 5 years.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 19 of section 5(d) of the Act: ANTITRUST
CONSIDERATIONS. - Unless necessary or appropriate to achieve the
purposes of this Act, the board of trade shall not -
(A) Adopt any rule or taking any action that results in any
unreasonable restraint of trade; or
(B) Impose any material anticompetitive burden on trading on the
contract market.
(a) Guidance. An entity seeking designation as a contract
market may request that the Commission consider under the
provisions of section 15(b) of the Act, any of the entity's rules,
including trading protocols or policies, and including both
operational rules and the terms or conditions of products listed
for trading, at the time of designation or thereafter. The
Commission intends to apply section 15(b) of the Act to its
consideration of issues under this core principle in a manner
consistent with that previously applied to contract markets.
(b) Acceptable Practices. [Reserved]
Core Principle 20 of section 5(d) of the Act: SYSTEM
SAFEGUARDS. - The board of trade shall -
(A) Establish and maintain a program of risk analysis and
oversight to identify and minimize sources of operational risk,
through the development of appropriate controls and procedures, and
the development of automated systems, that are reliable, secure,
and have adequate scalable capacity;
(B) Establish and maintain emergency procedures, backup
facilities, and a plan for disaster recovery that allow for the
timely recovery and resumption of operations and the fulfillment of
the responsibilities and obligations of the board of trade; and
(C) Periodically conduct tests to verify that backup resources
are sufficient to ensure continued order processing and trade
matching, price reporting, market surveillance, and maintenance of
a comprehensive and accurate audit trail.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 21 of section 5(d) of the Act: FINANCIAL
RESOURCES. -
(A) IN GENERAL. - The board of trade shall have adequate
financial, operational, and managerial resources to discharge each
responsibility of the board of trade.
(B) DETERMINATION OF ADEQUACY. - The financial resources of the
board of trade shall be considered to be adequate if the value of
the financial resources exceeds the total amount that would enable
the contract market to cover the operating costs of the contract
market for a 1-year period, as calculated on a rolling basis.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 22 of section 5(d) of the Act: DIVERSITY
OF BOARD OF DIRECTORS. - The board of trade, if a publicly traded
company, shall endeavor to recruit individuals to serve on the
board of directors and the other decision-making bodies (as
determined by the Commission) of the board of trade from among, and
to have the composition of the bodies reflect, a broad and
culturally diverse pool of qualified candidates.
(a) Guidance. [Reserved]
(b) Acceptable Practices. [Reserved]
Core Principle 23 of section 5(d) of the Act: SECURITIES
AND EXCHANGE COMMISSION. - The board of trade shall keep any such
records relating to swaps defined in section 1a(47)(A)(v) open to
inspection and examination by the Securities and Exchange
Commission.
(a) Guidance. A designated contract market should have
arrangements and resources for collecting and maintaining accurate
records pertaining to any swaps agreements defined in section
1a(47)(A)(v) of the Act, and should leave them open to inspection
and examination for a period of five years.
(b) Acceptable Practices. [Reserved]
[77 FR 36717, June 19, 2012, as amended at 83 FR 7996, Feb. 23,
2018; 86 FR 2072, Jan. 11, 2021]