[Federal Register: March 14, 2003 (Volume 68, Number 50)]
[Proposed Rules]
[Page 12319-12324]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14mr03-14]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
RIN 3038-AB94
Account Identification for Eligible Bunched Orders
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'' or
``CFTC'') is proposing to amend Commission Rule 1.35(a-1) (``Rule
1.35(a-1)''), which allows certain account managers to bunch customer
orders for execution and to allocate them to individual accounts at the
end of the trading session (hereinafter referred to as ``bunching'').
The
[[Page 12320]]
proposed rule would expand the availability of bunching, simplify the
process, and clarify the respective responsibilities of account
managers and futures commission merchants (``FCMs'').
DATES: Comments must be received by April 28, 2003.
ADDRESSES: Interested persons should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. In
addition, comments may be sent by facsimile transmission to facsimile
number (202) 418-5521, or by electronic mail to secretary@cftc.gov.
Reference should be made to ``Eligible orders.''
FOR FURTHER INFORMATION CONTACT: Christopher W. Cummings, Special
Counsel, or R. Trabue Bland, Attorney-Advisor, Division of Clearing and
Intermediary Oversight, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5430. Email: ccummings@cftc.gov or
tbland@cftc.gov.
SUPPLEMENTARY INFORMATION:
I. Background
A. Current Regulatory Requirements
Commission Rule 1.35(a-1), in effect since August 27, 1998, allows
bunched orders for eligible customers to be placed on a contract market
without specific customer account identification either at the time of
order placement or at the time of report of execution. Rule 1.35(a-1)
limits the types of customers whose orders may be bunched and requires
eligible account managers \1\ to make certain disclosures regarding the
allocation methodology, the standard of fairness of allocations,
composite or summary data of the trades, and whether the account
manager has any interest in the bunched order.
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\1\ The term account manager as used herein includes commodity
trading advisors, investment advisers and other persons identified
in the proposed regulation, who would place orders and direct the
allocation in accordance with the procedures set forth in the
proposal.
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Before placing an order eligible for post-execution allocation, the
account manager must identify, to the FCM clearing the order, each
eligible customer account to which fills will be allocated. Account
managers must provide written certification that they have identified
the eligible customer accounts to the FCM. Foreign account managers
must provide written certification from foreign authorities that they
are subject to regulation.
Currently, account managers must create and timestamp an order
origination document, identify the order by group identifier on the
office or floor order tickets, and identify the transaction on contract
market trade registers. The current rule also requires contract markets
to adopt audit procedures to determine compliance with Rule 1.35(a-1).
B. Developments Since Current Regulations Were Adopted
In December 2000, Congress passed the Commodity Futures
Modernization Act (``CFMA''). One of the mandates of the CFMA was for
the Commission to review its rules relating to intermediaries with an
eye to identifying areas where greater flexibility might be warranted.
Since the passage of the CFMA, numerous industry participants have
stated to Commission staff that the regulations related to bunched
orders needed to be revisited for a number of reasons.
For example, enhancements in technology have made it easier for
account managers to enter orders directly, thereby making certain
aspects of the current requirements less workable. Similarly, as
markets become more global in scope, account managers, both domestic
and foreign, have claimed that the current bunched order requirements
serve as a disincentive to using U.S. futures markets.
On February 2, 2001, the National Futures Association and the
Futures Industry Institute issued an industry-wide study of issues
associated with order transmission and order entry process by commodity
professionals (``Best Practices Study'').\2\ The study found that
although the current rule increased flexibility over previously
applicable requirements, many commenters in the study felt that the
current rule caused ``unnecessary processing delays without adding
customer protections that otherwise could be realized through equally
effective, less costly procedures.''\3\ The rule the Commission is
proposing today would adopt many of the approaches recommended in the
Best Practices Study.
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\2\ National Futures Association & Futures Industry Institute,
Recommendations for Best Practices in Order Entry and Transmission
of Exchange Traded Futures and Options Transactions (2001).
\3\ Id. at 25.
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II. Proposed Changes to Rule 1.35(a-1)(5)
A. Eligible Customers
As noted, the current rule limits eligibility for bunching to
certain types of sophisticated customers. The proposed rule would
expand eligibility to all customers who provide written investment
discretion to account managers.\4\
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\4\ Rule 1.35(a-1)(5) and NFA Compliance Rule 2-8(a), require
that grants of discretionary authority to account controllers be in
writing.
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Bunched orders can provide advantages to account managers and their
customers by facilitating the prompt execution of small orders.
Customers can benefit when a bunched order is placed because a bunched
order is more likely to be executed at a single price than would be the
case for a series of separate orders. In fact, customers may be
disadvantaged in the quality of the timing and execution of their order
if their orders are not bunched. With proper protections in place under
the proposed rule, customers should be assured that their trade
allocations are fair and equitable. Thus, the Commission proposes to
eliminate existing Rule 1.35(a-1)(5)(ii). Under the proposed rule, all
customer orders would be eligible for inclusion in bunched orders and
thus all customers that have granted written discretion to an eligible
account manager would be able to benefit from the advantages of bunched
orders.
The Commission invites comment on whether the proposed expansion of
the class of eligible customers is appropriate and whether the rule
contains proper protections.
On a related manner, in 1997, the Commission issued an interpretive
notice currently found at Appendix C to part 1 which allows bunching
under certain circumstances.\5\ Specifically, the Commission allows
CTAs to bunch orders if they prefile their allocation procedures with a
clearing member, NFA, or an exchange. The Commission requests comments
on whether this interpretive notice should be modified in any way given
the proposed changes to Rule 1.35(a-1)(5).
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\5\ 17 CFR part 1, Appendix C (2002), 62 FR 25470 (May 8, 1997).
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B. Eligible Account Managers
The Commission also is proposing to expand the class of account
managers permitted to bunch orders. The current rule applies to, among
others, commodity trading advisors (``CTAs'') and investment advisers
(``IAs'') who are registered with the Commission or the Securities
Exchange Commission (``SEC''). The Commission is proposing to allow
CTAs and IAs who are exempt from registration or are excluded from the
definition of CTA or IA by operation of law or rule to be eligible
account managers. Such entities are generally
[[Page 12321]]
exempt from registration because their clients are sophisticated
investors. Exempt account managers, however, remain subject to the
antifraud provisions of the Commodity Exchange Act and the Commission's
regulations. The proposed rule would not apply to associated persons or
Introducing Brokers exempt from Commission registration as CTAs
pursuant to Rule 4.14(a)(3) and (6).\6\
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\6\ 17 CFR 4.14(a)(3) (2002), 17 CFR 4.14(a)(6) (2002).
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The current rule allows foreign advisors to be eligible account
managers only if they are subject to regulation by a foreign regulator
or self-regulatory organization that has been granted an exemption
pursuant to Rule 30.10\7\ or have entered into a Memorandum of
Understanding or other arrangement with the Commission. As proposed,
Rule 1.35(a-1)(5)(i)(D) would allow foreign advisors, who exercise
discretionary trading authority over the accounts of non-United States
persons, to be eligible account managers.\8\
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\7\ 17 CFR 30.10 (2002). Rule 30.10 permits any person to
petition for an exemption from the Commission's Part 30 rules, which
govern foreign futures and option trading by persons located in the
United States. Commission orders issued pursuant to Rule 30.10
permit firms to solicit and accept orders for foreign futures and
option contracts from United States customers without registering
under the Commodity Exchange Act, based upon substituted compliance
with the rules and regulations of the jurisdiction in which the firm
is located.
\8\ 48 FR 35248, 35261 (August 3, 1983); see also, CFTC Staff
Letter No. 76-2 [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH)
] 20,222 (August 15, 1976)(Commission staff would not recommend
enforcement action for failure to register as a CPO where such
persons are located outside the U.S. and operating a pool that
accepts no United States participants and no funds from United
States sources).
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The Commission, of course, would retain antifraud and
antimanipulation authority. The Commission notes that foreign advisers
under the proposed rule would be foreign brokers or foreign traders
subject to Commission Rule 15.05, which makes the FCMs through which
foreign advisers make or cause to be made trades the agents of the
foreign advisers for purposes of communications from the Commission.\9\
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\9\ See 17 CFR 15.00(e) and 17 CFR 15.05 (2002).
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As noted above, the proposal would expand the categories of
entities permitted to bunch orders. The Commission requests comments on
whether it is appropriate to permit these entities to be eligible
account managers and whether the proposed protections are sufficient.
C. Disclosure
The Commission proposes to amend the disclosure requirement to be
an information availability requirement based upon the fact that the
Commission does not generally require registrants to affirmatively
disclose the mechanics of the process of trading.\10\
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\10\ Registrants must provide such information if requested.
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Current Rule 1.35(a-1)(5)(iii) specifies certain disclosure
requirements that account managers must provide to customers. The
proposal would replace these requirements with more general
requirements that eligible account managers make certain information
available to customers upon request. Account managers would be required
to make the following information available to customers: (1) The
general nature of the allocation methodology the account manager uses;
(2) summary or composite data sufficient for that customer to compare
its results with those of other relevant customers and, if applicable,
any account in which the account manager has an interest; and (3)
whether accounts in which the account manager may have any interest may
be included with customer accounts in bunched orders eligible for post-
execution allocation. The Commission is proposing to delete the
requirement that account managers set forth the standard by which they
will judge the fairness of the post-execution allocations as this
essential requirement is provided by the description of the nature of
the methodology and monitoring the account manager's post execution
allocations for bias over time. More importantly, the Commission is
proposing to retain the requirement that summary or composite data,
sufficient to compare results with the results of other comparable
customers, be made available to customers. In addition, the Commission
proposes to add a requirement that summary or composite data about
accounts in which the account manager has an interest be made available
to customers.
The Commission invites comment on whether the proposal to change
the disclosure requirement into an information availability requirement
is appropriate.
D. Account Certification
Current Rule 1.35(a-1)(5)(iv) requires that account managers make
certain certifications to FCMs. Both account managers and FCMs have
claimed that this requirement is burdensome, an impediment to the use
of current procedures and that it contributes to uncertainty regarding
the relative responsibility of FCMs and account managers. Accordingly,
the Commission is proposing to delete this requirement.
E. Allocation
The proposed rule would retain the essential requirement contained
in the existing rule that the allocation must be fair and equitable and
that no account or group of accounts may receive consistently favorable
or unfavorable treatment. The proposal, however, would make several
changes to the provisions governing allocation.
First, as noted above, the Commission is proposing to expand
eligibility to all customers who have provided written discretion to an
eligible account manager. Thus, the proposal would eliminate existing
Rule 1.35(a-1)(5)(v)(A) that requires that allocations only be made
among eligible customers. Second, to minimize end-of-trading session
congestion, the Commission proposes to amend existing Rule 1.35(a-
1)(5)(v) by requiring account managers to provide allocation
information to FCMs in a time sufficiently before the end of the
trading session during which the order is executed to ensure that
clearing records identify the ultimate customer for each trade. Third,
the Commission proposes to modify the provision addressing independent
review of allocations. The proposed rule would retain the requirement
that allocation methodology must be sufficiently objective and specific
to permit independent verification of the fairness of the
allocation.\11\ The Commission, however, is deleting the requirement
that appropriate allocation of a given trade should be verifiable
because that requirement, along with the accompanying recordkeeping
requirement in Rule 1.35(a-1)(vi) required an assessment of
``appropriateness'' on an order-by-order basis. Industry
representatives have stated that requiring an assessment of the
fairness on an order-by-order basis may not result in the most
efficient allocation of trades entered by an account manager.\12\
Therefore, and consistent with the recommendation of the Best Practices
Study, the proposed rule would require that verification of fairness be
judged over time rather than on an order-by-order basis.\13\
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\11\ Appendix C of part 1 contains examples of allocation
methods. See, 17 CFR Part 1, Appendix C (2002), 62 FR 25470 (May 8,
1997). As noted in Appendix C, ``the appropriateness of any
particular method for allocating split and partial fills depends on
the CTA's overall trading approach. For example, a daily rotation of
accounts may satisfy the general standards for CTAs who trade on a
daily basis but inappropriate for CTAs who trade less frequently.''
\12\ It is important to note that the standards for fair
allocation of trades may shift over time.
\13\ Best Practices Study at 26.
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The proposal also would clarify the respective responsibilities of
account
[[Page 12322]]
managers and FCMs. Proposed Rule 1.35(a-1)(5)(iii) would explicitly
state that allocation of bunched orders must be made by account
managers, not FCMs. Eliminating the certification requirements will
reduce the administrative and recordkeeping burden on FCMs. Of course,
FCMs will still have responsibility to monitor for unusual account
activity. In an interpretive notice accompanying NFA Compliance Rule 2-
10, NFA notes ``[t]he FCM has certain basic duties to its customers,
including the duty to supervise its own activities in a way designed to
ensure that it treats its customers fairly. Specifically, the FCM would
violate this duty if it has actual or constructive notice that
allocations for its customers may be fraudulent and fails to take
appropriate action. The FCM with such notice must make a reasonable
inquiry into the matter and, if appropriate, refer the matter to the
proper regulatory authorities.''\14\ Thus, FCMs will have an ongoing
responsibility to monitor for unusual account activity.\15\
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\14\ Interpretive Notice, NFA Compliance Rule 2-10: The
Allocation of Block Orders for Multiple Accounts (June 9, 1998).
\15\ Id; see also, 17 CFR 166.3 (2002)(stating that Commission
registrants have a duty to diligently supervise handling of all
commodity interest accounts). FCMs also have a duty to monitor for
money laundering and report such activities to the appropriate
regulatory authority. Interpretive Notice, NFA Compliance Rule 2-9:
FCM and IB Anti-Money Laundering Program. For example, if an adviser
places bunched orders with an FCM and routinely instructs the FCM to
allocate favorable trades or unfavorable trades in a bunched order
to one customer account, then this could constitute unusual account
activity that an FCM has a duty to investigate and if appropriate
report to regulators.
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The Commission requests comment on whether the proposed changes
strike the appropriate balance with regard to judging allocations and
assigning responsibilities to account managers and FCMs.
F. Recordkeeping
Current Rule 1.35(a-1)(5)(vi) requires account managers and FCMs to
keep specific information to identify customer orders and reconstruct
trades. Pursuant to the proposed rule, the Commission is clarifying
that the fairness of an allocation will not be assessed on an order-by-
order basis but on an assessment over time. If divergent performance
among client accounts occurs over time, the account manager must have
records to demonstrate that the divergent performance is attributable
to factors other than unfair trade allocation. Thus, the proposed rule
will allow account managers and FCMs greater flexibility in
recordkeeping, while retaining the ability of the Commission to
determine unfair trade allocation.
Specifically, the Commission proposes to eliminate existing Rule
1.35(a-1)(5)(vi) and to replace the recordkeeping requirement with a
requirement that account managers make certain information available to
any representative of the Commission, the United States Department of
Justice, or other appropriate regulatory agency. The information would
include the information required to be made available to customers
pursuant to proposed Rule 1.35(a-1)(5)(ii) and the allocation
information created pursuant to proposed Rule 1.35(a-1)(5)(iii). Under
proposed Rule 1.35(a-1)(5)(iv)(C), FCMs that execute trades for orders
eligible for post-execution allocation, or that carry accounts to which
contracts executed for such orders are allocated, must maintain records
that identify each order subject to post-execution allocation and the
accounts to which contracts executed for such order are allocated.\16\
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\16\ The recordkeeping provisions of Rule 1.31 would still
apply. 17 CFR 1.31 (2002).
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For example, account managers employing post-execution allocation
procedures generally would be expected to forward written allocation
instructions to the clearing firm by facsimile or e-mail or other
electronic means.\17\ In those instances in which allocation
instructions are furnished orally, the FCM must create a written record
of the account manager's instructions. In each case, these records will
be available to the Commission and other regulatory agencies or self-
regulatory organizations. The Commission should be able to reconstruct
trades from these records.
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\17\ It is important to note that unless the order is submitted
consistent with the requirements of this proposed rule, the order
must contain a customer identification number. See, 17 CFR 1.35(a-1)
(2002).
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The proposal contains a provision to address cases in which account
managers fail to provide the Commission with the information requested
pursuant to proposed Rule 1.35(a-1)(5)(iv)(A) or proposed Rule 1.35(a-
1)(5)(iv)(B). Specifically, the Commission may prohibit the account
manager from submitting orders for execution on designated contract
markets and prohibit FCMs from accepting orders from such account
managers. Commission action under this provision would not require
prior notice and hearing. The failure of an account manager to respond
to a request for information under this rule would be sufficient. Any
account manager that believes he or she is adversely affected by this
process may use the procedures outlined in Rule 21.03(g).\18\ Any
prohibitions imposed pursuant to this Rule 1.35(a-1)(5)(iv)(D) would be
without prejudice to other remedies the Commission or other regulatory
body may have against the account manager in question for violation of
the rule or any other legal requirements.\19\
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\18\ 17 CFR 21.03(g) (2002).
\19\ See, 17 CFR 21.03(h) (2002).
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G. Self-Regulatory Organization Rule Enforcement and Audit Procedures
Existing Rule 1.35(a-1)(5)(vii) requires contract markets to adopt
audit procedures to determine compliance with the certification
requirements of Rule 1.35(a-1)(5)(vi). As noted above, the Commission
is proposing to eliminate the recordkeeping and certification
requirement and, accordingly, to eliminate Rule 1.35(a-1)(5)(vii).
Although, the Commission proposes to eliminate Rule 1.35(a-
1)(5)(vii), the Commission will work with NFA to evaluate NFA's audit
and examination process to identify any supervisory enhancements that
will be necessary to ensure that customers are adequately protected and
treated fairly.
III. Requests For Comment
The Commission has identified throughout this release issues on
which it requests comment. In addition to the specific issues raised
above, the Commission welcomes comment on any aspect of the proposed
rule.
IV. Other Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et. seq.,
requires that agencies, in proposing rules, consider the impact of
those rules on small businesses. The Commission has previously
determined that contract markets,\20\ futures commission merchants,\21\
registered commodity pool operators \22\ and large traders \23\ are not
``small entities'' for purposes of the Regulatory Flexibility Act. The
Commission has previously determined to evaluate within the context of
a particular rule proposal whether all or some commodity trading
advisors should be considered ``small entities'' for purposes of the
Regulatory Flexibility Act and, if so, to analyze the economic impact
on commodity trading advisors of any such rule at that time.\24\
[[Page 12323]]
Commodity trading advisors who would place eligible orders pursuant to
these procedures would likely do so for multiple clients and would
likely be participating as investment managers in more than one
financial market. Accordingly, the Commission does not believe that
commodity trading advisors should be considered ``small entities'' for
purposes of this rule.
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\20\ 47 FR 18618, 18619 (April 30, 1982).
\21\ Id.
\22\ Id. at 18620.
\23\ Id.
\24\ Id.
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Therefore, the Chairman, on behalf of the Commission, hereby
certifies, pursuant to 5 U.S.C. 605(b), that the action proposed to be
taken herein will not have a significant economic impact on a
substantial number of small entities.
B. Paperwork Reduction Act of 1995
This proposed rulemaking affects information collection
requirements. As required by the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)), the Commission has submitted a copy of this section to
the Office of Management and Budget for its review.
Collection of Information
Rules Pertaining to Contract Markets and Their Members, OMB Control
Number 3038-0022.
The expected effect of the proposed amended rule will be to not
change the burden previously approved by OMB for this collection
because, although it will result in an increase in the number of
filings by account managers, it will result in a decrease in filings by
FCMs.
Specifically:
The burden associated with Commission Rule 1.35(a-1)(5) is expected to
be unchanged:
Estimated number of respondents: 400.
Annual responses by each respondent: 1.
Estimated average hours per response: 13.
Annual reporting burden: 52 hours.
This annual reporting burden of 52 hours represents no change in
the number of hours as a result of the proposed amendments to Rule
1.35(a-1).
Organizations and individuals desiring to submit comments on the
information collection requirements should direct them to the Office of
Information and Regulatory Affairs, OMB, Room 10235 New Executive
Office Building, Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in--
[sbull] 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;
[sbull] Evaluating the accuracy of the Commission's estimate of the
burden of the proposed collection of information, including the
validity of the methodology and assumptions used;
[sbull] Enhancing the quality, usefulness, and clarity of the
information to be collected; and
[sbull] Minimizing the burden of collection of information on those
who are to respond, including through the use of appropriate automated
electronic, mechanical, or other technological collection techniques or
other forms of information technology, e.g., permitting electronic
submission of responses.
OMB is required to make a decision concerning the collection of
information contained in these proposed regulations between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed regulations.
Copies of the information collection submission to OMB are
available from the CFTC Clearance Officer, 1155 21st Street N.W.,
Washington, DC 20581, (202) 418-5160.
C. Cost-Benefit Analysis
Section 15(a) of the Act requires the Commission to consider the
costs and benefits of its action before issuing a new regulation under
the Act. By its terms, section 15(a) does not require the Commission to
quantify the costs and benefits of a new regulation or to determine
whether the benefits of the proposed regulation outweigh its costs.
Rather, section 15(a) simply requires the Commission to ``consider the
costs and benefits'' of its action.
Section 15(a) further specifies that costs and benefits shall be
evaluated in light of five broad areas of market and public concern:
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. Accordingly, the Commission could in its discretion
give greater weight to any one of the five enumerated areas and could
in its discretion determine that, notwithstanding its costs, a
particular rule was necessary or appropriate to protect the public
interest or to effectuate any of the provisions or to accomplish any of
the purposes of the Act.
The proposed amendments are intended to facilitate increased
flexibility and consistency, and to rationalize application of
Commission regulations to entities subject to other regulatory
frameworks. The Commission is considering the costs and benefits of
these rules in light of the specific provisions of section 15(a) of the
Act:
1. Protection of market participants and the public.
While certain of the proposed amendments are expected to lessen the
burden imposed upon FCMs and account managers, market participants and
the public will be protected by requirements in the allocation
procedure. Accordingly, the proposed amendments should have no effect
on the Commission's ability to protect market participants and the
public.
2. Efficiency and competition.
The proposed amendments are expected to benefit efficiency in the
commodity futures and options markets, resulting in greater liquidity
and market efficiency.
3. Financial integrity of futures markets and price discovery.
The proposed amendments should have no effect, from the standpoint
of imposing costs or creating benefits, on the financial integrity or
price discovery function of the commodity futures and options markets.
4. Sound risk management practices.
The proposed amendments should have no effect on sound risk
management practices.
5. Other public interest considerations.
The proposed amendments will also take into account certain effects
of legislative changes and the passage of time.
After considering these factors, the Commission has determined to
propose the amendments discussed above. The Commission invites public
comment on its application of the cost-benefit provision. Commenters
also are invited to submit any data that they may have quantifying the
costs and benefits of the proposal with their comment letters.
List of Subjects in 17 CFR Part 1
Brokers, Commodity futures, Commodity options, Consumer protection,
Contract markets, Customers, Members of contract markets,
Noncompetitive trading, Reporting and recordkeeping requirements, Rule
enforcement programs.
In consideration of the foregoing, and pursuant to the authority
contained in the Commodity Exchange Act and, in
[[Page 12324]]
particular, sections 5, 5a, 5b, 6(a), 6b, 8a(7), and 8c, 7 U.S.C. 7,
7a, 7b, 8(a), 8b, 12a(7), 12a(9), and 12c, the Commission hereby
proposes to amend Part 1 of Chapter I of Title 17 of the Code of
Federal Regulations as follows:
PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT
1. The authority citation for Part 1 continues to read as follows:
Authority: 7 U.S.C. 1a, 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f,
6g, 6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a,
12c, 13a, 13a-1, 16, 16a, 19, 21, 23, 24.
2. Section 1.35 is proposed to be amended by revising paragraph (a-
1)(5) to read as follows:
Sec. 1.35 Records of cash commodity, futures and option transactions.
* * * * *
(a-1) * * *
(5) Post-execution allocation of bunched orders. Specific customer
account identifiers for accounts included in bunched orders need not be
recorded at time of order placement or upon report of execution if the
requirements of paragraphs (a-1)(5)(i)-(iv) are met.
(i) Eligible account managers. The person placing and directing the
allocation of an order eligible for post-execution allocation must have
been granted written investment discretion with regard to participating
customer accounts. The following persons shall qualify as eligible
account managers:
(A) A commodity trading advisor registered with the Commission
pursuant to the Act or excluded or exempt from registration under the
Act or the Commission's rules, except for entities exempt under Sec.
4.14(a)(3) or Sec. 4.14(a)(6) of this chapter;
(B) An investment adviser registered with the Securities and
Exchange Commission pursuant to the Investment Advisers Act of 1940 or
with a state pursuant to applicable state law or excluded or exempt
from registration under such Act or applicable state law or rule;
(C) A bank, insurance company, trust company, or savings and loan
association subject to federal or state regulation; or
(D) A foreign adviser that exercises discretionary trading
authority solely over the accounts of non-U.S. persons, as defined in
Sec. 4.7(a)(1)(iv) of this chapter.
(ii) Information. Eligible account managers shall make the
following information available to customers upon request:
(A) The general nature of the allocation methodology the account
manager will use;
(B) Whether accounts in which the account manager may have any
interest may be included with customer accounts in bunched orders
eligible for post-execution allocation; and
(C) Summary or composite data sufficient for that customer to
compare its results with those of other comparable customers and, if
applicable, any account in which the account manager has an interest.
(iii) Allocation. Orders eligible for post-execution allocation
must be allocated by an eligible account manager in accordance with the
following:
(A) Allocations must be made as soon as practicable after the
entire transaction is executed, but in any event account managers must
provide allocation information to futures commission merchants no later
than a time sufficiently before the end of the day the order is
executed to ensure that clearing records identify the ultimate customer
for each trade.
(B) Allocations must be fair and equitable. No account or group of
accounts may receive consistently favorable or unfavorable treatment.
(C) The allocation methodology must be sufficiently objective and
specific to permit independent verification of the fairness of the
allocations using that methodology by appropriate regulatory and self-
regulatory authorities and by outside auditors.
(iv) Records.
(A) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, the
information specified in paragraph (a-1)(5)(ii) of this section.
(B) Eligible account managers shall keep and must make available
upon request of any representative of the Commission, the United States
Department of Justice, or other appropriate regulatory agency, records
sufficient to demonstrate that all allocations meet the standards of
paragraph (a-1)(5)(iii) of this section and to permit the
reconstruction of the handling of the order from the time of placement
by the account manager to the allocation to individual accounts.
(C) Futures commission merchants that execute orders or that carry
accounts eligible for post-execution allocation, and members of
contract markets that execute such orders, must maintain records that,
as applicable, identify each order subject to post-execution allocation
and the accounts to which contracts executed for such order are
allocated.
(D) In addition to any other remedies that may be available under
the Act or otherwise, if the Commission has reason to believe that an
account manager has failed to provide information requested pursuant to
paragraph (a-1)(5)(iv)(A) or (a-1)(5)(iv)(B) of this section, the
Commission may inform in writing any designated contract market or
derivatives transaction execution facility and that designated contract
market or derivatives transaction execution facility shall prohibit the
account manager from submitting orders for execution except for
liquidation of open positions and no futures commission merchants shall
accept orders for execution on any designated contract market or
derivatives transaction execution facility from the account manager
except for liquidation of open positions.
(E) Any account manager that believes he or she is or may be
adversely affected or aggrieved by action taken by the Commission under
paragraph (D) of this section shall have the opportunity for a prompt
hearing in accordance with the provisions of Sec. 21.03(g) of this
chapter.
* * * * *
Issued in Washington, DC on March 10, 2003 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 03-6177 Filed 3-13-03; 8:45 am]
BILLING CODE 6351-01-P