[Code of Federal Regulations]
[Title 17, Volume 1]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 17CFR33.4]

[Page 385-387]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 33--REGULATION OF DOMESTIC EXCHANGE-TRADED COMMODITY OPTION TRANSACTIONS--Table of Contents
 
Sec. 33.4  Designation as a contract market for the trading of commodity options.

    The Commission may designate any board of trade located in the 
United States as a contract market for the trading of options on 
contracts of sale for future delivery or for options on physicals in any 
commodity regulated under the Act, when the applicant complies with and 
carries out the requirements of the Act (as provided in Sec. 33.2), the 
regulations in this part, and the following conditions and requirements 
with respect to the commodity option for which the designation is 
sought:
    (a) Such board of trade--
    (1) Applies for designation as a contract market for the purpose of 
trading ``put'' and/or ``call'' options which:
    (i) Are not capable of being transferred, assigned or otherwise 
disposed of other than on or subject to the rules of the board of trade; 
and
    (ii) With respect to options on futures contracts, may be exercised 
only by the establishment, by book entry, in the clearing organization 
of positions in the underlying futures contract.
    (2) [Reserved]
    (3) If designation for the trading of options on futures contracts 
is sought, is designated as a contract market for the underlying 
contract of sale for future delivery which is the subject of the option 
for which designation is sought, and submits, if so requested by the 
Commission, the information called for by Sec. 1.50 of this chapter 
(relating to continued compliance with the conditions and requirements 
for designation as a contract market) for the specified futures contract 
underlying the option for which the designation is sought, and the 
applicant complies with the conditions and requirements for designation 
as a contract market for such contract for future delivery as set forth 
in sections 5 and 5a(a) of the Act and as set forth in these 
regulations.
    (4) In the case of a contract market which is requesting designation 
for the trading of options on physicals for which it is designated as a 
contract market for contracts of sale for future delivery or for options 
on futures contracts, submits, if so requested by the Commission, the 
information called for by Sec. 1.50 of this chapter (relating to 
continued compliance with the conditions and requirements for 
designition as a contract market) for that specified futures contract 
and/or options on that futures contract, and the applicant complies with 
the conditions and requirements for designation as a contract market for 
such contract for future delivery as set forth in sections 5 and 5a(a) 
of the Act and as set forth in these regulations.
    (5) Demonstrates that:
    (i) The commodity option for which it is requesting designation is 
likely to serve a legitimate economic purpose;
    (ii)-(iii) [Reserved]

[[Page 386]]

    (iv) If designation for the trading of options on physicals is 
sought and thereafter for the purpose of demonstrating continued 
compliance with the Act and these regulations:
    (A) The cash market for the underlying physical exhibits sufficient 
liquidity such that the grantor and purchaser of the option have the 
opportunity to purchase or sell the underlying physical at its economic 
value in normal cash marketing channels;
    (B) There exists an accurate and widely-disseminated price series 
for the underlying physical which is deliverable on the option contract;
    (C) Trading of such options will not be disruptive of trading in the 
cash market for the underlying physical or of any futures contract; and
    (D) The individual terms and conditions of the option contract 
conform to practices in the underlying cash market or are otherwise 
justified, including a demonstration that the terms and conditions of 
the option contract provide for a deliverable supply which is not 
conducive to price manipulation or distortion, consistent with a 
description of the cash market furnished by the board of trade.
    (b) Such board of trade adopts rules which:
    (1) Prescribe in regard to strike prices:
    (i) The dollar amount of the intervals between strike prices;
    (ii) The strike prices at which trading in a new option expiration 
will be introduced;
    (iii) The point, in terms of the price of the underlying futures 
contract or underlying physical, at which a new strike price will be 
introduced in any option which is already trading;
    (iv) [Reserved]
    (2) Prescribe an expiration date of the option that is not less than 
one business day before the earlier of the last trading day or the first 
notice day of any futures contract on the same or a related commodity; 
Provided, however, That where the underlying futures contract is cash-
settled, the option may expire simultaneously with the expiration of the 
futures contract.
    (3) Require that upon exercise of each option, notification thereof 
be given to the option grantor.
    (4) Require, with respect to all written option customer complaints, 
that each member futures commission merchant which engages in the offer 
or sale of commodity options regulated under this part:
    (i) Retain all such complaints;
    (ii) Make and retain a record of the date the complaint was 
received, the associated person who serviced, or the introducing broker 
who introduced, the account, a general description of the matter 
complained of, and what, if any, action was taken by the futures 
commission merchant in regard to the complaint; and
    (5) Require each member futures commission merchant which engages in 
the offer or sale of option contracts regulated under this part to adopt 
and enforce written procedures pursuant to which it will be able to 
supervise adequately each option customer's account, including but not 
limited to, the solicitation of any such account: Provided, That as used 
in this paragraph (b)(5), the term ``option customer'' does not include 
another futures commission merchant.
    (6) [Reserved]
    (7) Require each member futures commission merchant which engages in 
the offer or sale of option contracts regulated under this part to 
enforce the disclosure requirements set forth in Sec. 33.7.
    (8)-(9) [Reserved]
    (10) Prohibit fraudulent or high-pressure sales communications by 
member futures commission merchants relating to the offer or sale of 
option contracts regulated under this part.
    (11) Establish appropriate criteria which are reasonably designed to 
secure performance, upon exercise, of the option contracts.
    (c) Such board of trade establishes procedures and conducts sales 
practice audits of member futures commission merchants which engage in 
the offer or sale of option contracts regulated under this part. These 
sales practice audits must be of sufficient scope to enforce the 
contract market's rules, including imvestigation for the improper

[[Page 387]]

handling of discretionary accounts, inadequate internal supervision, 
fraudulent or high-pressure sales communications, compliance with 
disclosure requirements, improper handling and disposition of option 
customer complaints, and, where applicable, the futures commission 
merchant's offer or sale of deep-out-of-the-money options.
    (d) A board of trade must submit an analysis and justification of 
the individual terms and conditions of the option contract. In 
determining whether to approve option contract terms and conditions, the 
Commission may consider the analysis and justification submitted for 
such terms and conditions, including, without limitation:
    (1) [Reserved]
    (2) The conditions precedent to the exercise of the commodity option 
and the method by which the option may be exercised;
    (3) The nature of the clearing mechanism to be utilized for the 
commodity option, and the differences, if any, among the clearing 
mechanisms for options on futures contracts, options on physicals, and 
futures contracts;
    (4) Specific notice periods, including the periods from the date 
notice of intent to exercise an option is given until exercise is 
accomplished;
    (5) The default provisions and procedures of the commodity option, 
if any; and
    (6) Permitted deviations from or substitutes for compliance with the 
terms and conditions set forth in paragraphs (d) (1) through (5) of this 
section.
    (e) Such board of trade provides for the general quotation and 
dissemination of volume and last sale price information on a timely 
basis with respect to the commodity option for which designation is 
sought and with respect to the underlying futures contract.
    (f) Such board of trade demonstrates that clearance and processing 
of option transactions on or subject to the rules of the board of trade 
will not adversely affect the clearance and processing of any 
transactions for future delivery on or subject to the rules of the board 
of trade.

(Approved by the Office of Management and Budget under control number 
3038-0007)

(Secs. 2(a)(1)(A), 4c(b), 4c(c), and 8a of the Commodity Exchange Act, 7 
U.S.C. 2, 6c(b), 6c(c) and 12a; secs. 2(a)(1)(A), 4c, 4d, 4f, and 8a(5) 
(7 U.S.C. 2(a)(1)(A), 6c, 6d, 6f and 12a(5) (1982)))

[46 FR 54529, Nov. 3, 1981, as amended at 46 FR 63036, Dec. 30, 1981; 47 
FR 57017, Dec. 22, 1982; 48 FR 786, Jan. 7, 1983; 48 FR 35302, Aug. 3, 
1983; 49 FR 33644, Aug. 24, 1984; 49 FR 44893, Nov. 13, 1984; 51 FR 
17474, May 13, 1986; 52 FR 779, Jan. 9, 1987; 56 FR 43697, Sept. 4, 
1991; 57 FR 58978, Dec. 14, 1992; 58 FR 30703, May 27, 1993; 59 FR 5526, 
Feb. 7, 1994; 61 FR 2720, Jan. 29, 1996; 63 FR 18834, Apr. 16, 1998; 63 
FR 32732, June 16, 1998]