[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: 17CFR38.6]

[Page 411-420]
 
              TITLE 17--COMMODITY AND SECURITIES EXCHANGES
 
             CHAPTER I--COMMODITY FUTURES TRADING COMMISSION
 
PART 38--DESIGNATED CONTRACT MARKETS--Table of Contents
 
Sec. 38.6  Enforceability.

    An agreement, contract or transaction entered into on or pursuant to 
the rules of a designated contract market shall not be void, voidable, 
subject to rescission or otherwise invalidated or rendered unenforceable 
as a result of:
    (a) A violation by the designated contract market of the provisions 
of section 5 of the Act or this part 38; or
    (b) Any Commission proceeding to alter or supplement a rule, term or 
condition under section 8a(7) of the

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Act, to declare an emergency under section 8a(9) of the Act, or any 
other proceeding the effect of which is to alter, supplement, or require 
a designated contract market to adopt a specific term or condition, 
trading rule or procedure, or to take or refrain from taking a specific 
action.

               Appendix A to Part 38--Application Guidance

    This appendix provides guidance for applicants for designation as a 
contract market under sections 5(b) and 6 of the Act and Sec. 38.3, on 
meeting the criteria for designation both initially and on an ongoing 
basis. The guidance following each designation criterion is illustrative 
only of the types of matters an applicant may address, as applicable, 
and is not intended to be a mandatory checklist. Addressing the issues 
and questions set forth in this appendix would help the Commission in 
its consideration of whether the application has met the criteria for 
designation. To the extent that compliance with, or satisfaction of, a 
criterion for designation is not self-explanatory from the face of the 
contract market's rules, which may be trading protocols or terms and 
conditions, the application should include an explanation or other form 
of documentation demonstrating that the applicant meets the designation 
criteria of section 5(b) of the Act.
    Designation Criterion 1 of section 5(b) of the Act: IN GENERAL--To 
be designated as a contract market, the board of trade shall demonstrate 
to the Commission that the board of trade meets the criteria specified 
in this appendix.
    A board of trade preparing to submit to the Commission an 
application for designation as a contract market is encouraged to 
contact Commission staff for guidance and assistance in preparing an 
application. Applicants may submit a draft application for review and 
feedback prior to the submission of an actual application without 
triggering the application review procedures of Sec. 38.3.
    Designation Criterion 2 of section 5(b) of the Act: PREVENTION OF 
MARKET MANIPULATION--The board of trade shall have the capacity to 
prevent market manipulation through market surveillance, compliance, and 
enforcement practices and procedures, including methods for conducting 
real-time monitoring of trading and comprehensive and accurate trade 
reconstructions.
    A designation application should demonstrate a capacity to prevent 
market manipulation, including that the contract market has trading and 
participation rules deterring abuses and a dedicated regulatory 
department, or an effective delegation of that function.
    Designation Criterion 3 of section 5(b) of the Act: FAIR AND 
EQUITABLE TRADING--The board of trade shall establish and enforce 
trading rules to ensure fair and equitable trading through the 
facilities of the contract market, and the capacity to detect, 
investigate, and discipline any person that violates the rules. The 
rules may authorize--(A) transfer trades or office trades; (B) an 
exchange of--(i) futures in connection with a cash commodity 
transaction; (ii) futures for cash commodities; or (iii) futures for 
swaps; or (C) 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) Establishing and enforcing trading rules to ensure fair and 
equitable trading on a contract market, among other things, includes 
providing to market participants, on a fair, equitable and timely basis, 
information regarding, prices, bids and offers, as applicable to the 
market.
    (b) Such trading rules should be designed with adequate specificity.
    (c) A contract market that authorizes transfer trades or office 
trades; an exchange of futures for physicals or futures for swaps; or 
any other non-competitive transactions, including block trades, should 
have rules particularly authorizing such transactions and establishing 
appropriate recordkeeping requirements.
    Designation Criterion 4 of section 5(b) of the Act: TRADE EXECUTION 
FACILITY--The board of trade shall--(A) establish and enforce rules 
defining, or specifications detailing, the manner of operation of the 
trade execution facility maintained by the board of trade, including 
rules or specifications describing the operation of any electronic 
matching platform; and (B) demonstrate that the trade execution facility 
operates in accordance with the rules or specifications.
    (a) An application of a board of trade to be designated as a 
contract market should include the system's trade-matching algorithm and 
order entry procedures. An application involving a trade-matching 
algorithm that is based on order priority factors other than price and 
time should include a brief explanation of the algorithm.
    (b) A designated contract market's specifications on initial and 
periodic objective testing and review of proper system functioning, 
adequate capacity and security for any automated systems should be 
included in its application. A board of trade should submit in the 
contract market application, information on the objective testing and 
review carried out on its automated system. The Commission believes that 
the guidelines issued by the International Organization of Securities 
Commissions (IOSCO) in 1990

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(which have been referred to as the ``Principles for Screen-Based 
Trading Systems''), and adopted by the Commission on November 21, 1990 
(55 FR 48670), as supplemented in October, 2000, are appropriate 
guidelines for an electronic trading facility to apply to electronic 
trading systems. Any program of objective testing and review of the 
system should be performed by a qualified independent professional (but 
not necessarily a third-party contractor).
    Designation Criterion 5 of section 5(b) of the Act: FINANCIAL 
INTEGRITY OF TRANSACTIONS--The board of trade shall establish and 
enforce rules and procedures for ensuring the financial integrity of 
transactions entered into by or through the facilities of the contract 
market, including the clearance and settlement of the transactions with 
a derivatives clearing organization.
    (a) A designated contract market should provide for the financial 
integrity of transactions by setting appropriate minimum financial 
standards for members and non-intermediated market participants, 
margining systems, appropriate margin forms and appropriate default 
rules and procedures. Absent Commission action pursuant to its exemptive 
authority under section 4(c) of the Act, transactions executed on the 
contract market (other than stock futures products), if cleared, must be 
cleared through a derivatives clearing organization registered as such 
with the Commission. The Commission believes ensuring and enforcing the 
financial integrity of transactions and intermediaries, and the 
protection of customer funds should include monitoring compliance with 
the contract market's minimum financial standards. In order to monitor 
for minimum financial requirements, a contract market should routinely 
receive and promptly review financial and related information.
    (b) A designated contract market should have rules concerning the 
protection of customer funds that address appropriate minimum financial 
standards for intermediaries, the segregation of customer and 
proprietary funds, the custody of customer funds, the investment 
standards for customer funds, related recordkeeping procedures and 
related intermediary default procedures.
    Designation Criterion 6 of section 5(b) 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.
    The disciplinary procedures established by a designated contract 
market should give the contract market both the authority and ability to 
discipline and limit or suspend a member's activities as well as the 
authority and ability to terminate a member's activities pursuant to 
clear and fair standards. The authority to discipline or limit or 
suspend the activities of a member or of a market participant could be 
established in a contract market's rules, user agreements or other 
means. An organized exchange or a trading facility could satisfy this 
criterion for a member with trading privileges but having no, or only 
nominal, equity, in the facility and for a non-member market participant 
by expelling or denying future access to such persons upon a finding 
that such a person has violated the board of trade's rules.
    Designation Criterion 7 of section 5(b) of the Act: PUBLIC ACCESS--
The board of trade shall provide the public with access to the rules, 
regulations, and contract specifications of the board of trade.
    A board of trade operating as a contract market may provide 
information to the public by placing the information on its web site.
    Designation Criterion 8 of section 5(b) of the Act: ABILITY TO 
OBTAIN INFORMATION--The board of trade shall establish and enforce rules 
that will allow the board of trade to obtain any necessary information 
to perform any of the functions described in this appendix, including 
the capacity to carry out such international information-sharing 
agreements as the Commission may require.
    A designated contract market should have the authority to collect 
information and documents on both a routine and non-routine basis 
including the examination of books and records kept by the contract 
market's members and by non-intermediated market participants. 
Appropriate information-sharing agreements could be established with 
other boards of trade or the Commission could act in conjunction with 
the contract market to carry out such information sharing.

    Appendix B to Part 38--Guidance on, and Acceptable Practices in, 
                     Compliance with Core Principles

    1. This appendix provides guidance concerning the core principles 
with which a board of trade must comply to maintain designation under 
section 5(d) of the Act and Secs. 38.3 and 38.5. The guidance is 
provided in paragraph (a) following each core principle and it can be 
used to demonstrate to the Commission core principle compliance, under 
Secs. 38.3(a) and 38.5. The guidance for each core principle is 
illustrative only of the types of matters a board of trade may address, 
as applicable, and is not intended to be a mandatory checklist. 
Addressing the issues and questions set forth in this appendix would 
help the Commission in its consideration of whether the board of trade 
is in compliance with the core principles. To the extent that compliance 
with, or satisfaction of, a core principle is not self-explanatory from 
the face of the board of trade's rules,

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which may be terms and conditions or trading protocols, an application 
pursuant to Sec. 38.3, or a submission pursuant to Sec. 38.5 should 
include an explanation or other form of documentation demonstrating that 
the board of trade complies with the core principles.
    2. Acceptable practices meeting the requirements of the core 
principles are set forth in paragraph (b) following each core principle. 
Boards of trade that follow the specific practices outlined under 
paragraph (b) for any core principle in this appendix will meet the 
applicable core principle. Paragraph (b) is for illustrative purposes 
only, and does not state the exclusive means for satisfying a core 
principle.
    Core Principle 1 of section 5(d) of the Act: IN GENERAL--To maintain 
the designation of a board of trade as a contract market, the board of 
trade shall comply with the core principles specified in this 
subsection. The board of trade shall have reasonable discretion in 
establishing the manner in which it complies with the core principles.
    A board of trade applying for designation as a contract market must 
satisfactorily demonstrate its capacity to operate in compliance with 
the core principles under section 5(d) of the Act and Sec. 38.3. The 
Commission may require that a board of trade operating as a contract 
market demonstrate to the Commission that it is in compliance with one 
or more core principles.
    Core Principle 2 of section 5(d) of the Act: COMPLIANCE WITH RULES--
The board of trade shall monitor and enforce compliance with the rules 
of the contract market, including the terms and conditions of any 
contracts to be traded and any limitations on access to the contract 
market.
    (a) Application guidance. (1) A designated contract market should 
have arrangements and resources for effective trade practice 
surveillance programs, with the authority to collect information and 
documents on both a routine and non-routine basis including the 
examination of books and records kept by the contract market's members 
and by non-intermediated market participants. The arrangements and 
resources should facilitate the direct supervision of the market and the 
analysis of data collected. Trade practice surveillance programs could 
be carried out by the contract market itself or through delegation to a 
third party. If the contract market delegates the responsibility of 
carrying out a trade practice surveillance program to a third party, 
such third party should have the capacity and authority to carry out 
such program, and the contract market should retain appropriate 
supervisory authority over the third party.
    (2) A designated contract market should have arrangements, resources 
and authority for effective rule enforcement. The Commission believes 
that this should include the authority and ability to discipline and 
limit, or suspend the activities of a member or market participant as 
well as the authority and ability to terminate the activities of a 
member or market participant pursuant to clear and fair standards. An 
organized exchange or a trading facility could satisfy this criterion 
for members with trading privileges but having no, or only nominal, 
equity, in the facility and non-member market participants, by expelling 
or denying such persons future access upon a determination that such a 
person has violated the board of trade's rules.
    (b) Acceptable practices. An acceptable trade practice surveillance 
program generally would include:
    (1) Maintenance of data reflecting the details of each transaction 
executed on the contract market;
    (2) Electronic analysis of this data routinely to detect potential 
trading violations;
    (3) Appropriate and thorough investigative analysis of these and 
other potential trading violations brought to the contract market's 
attention; and
    (4) Prompt and effective disciplinary action for any violation that 
is found to have been committed. The Commission believes that the latter 
element should include the authority and ability to discipline and limit 
or suspend the activities of a member or market participant pursuant to 
clear and fair standards that are available to market participants. See, 
e.g. 17 CFR part 8.
    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) Application guidance. Contract markets may list new products for 
trading by self-certification under Sec. 40.2 of this chapter or may 
submit products for Commission approval under Sec. 40.3 and part 40, 
Appendix A, of this chapter.
    (b) Acceptable practices. Guideline No. 1, 17 CFR part 40, Appendix 
A may be used as guidance in meeting this core principle for both new 
product listings and existing listed contracts.
    Core Principle 4 of section 5(d) of the Act: MONITORING OF TRADING--
The board of trade shall monitor trading to prevent manipulation, price 
distortion, and disruptions of the delivery or cash-settlement process.
    (a) Application guidance. A contract market could prevent market 
manipulation through a dedicated regulatory department, or by delegation 
of that function to an appropriate third party.
    (b) Acceptable practices. (1) An acceptable program for monitoring 
markets will generally involve the collection of various market data, 
including information on traders' market activity. Those data should be 
evaluated on an ongoing basis in order to make an

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appropriate regulatory response to potential market disruptions or 
abusive practices.
    (2) The designated contract market should collect data in order to 
assess whether the market price is responding to the forces of supply 
and demand. Appropriate data usually include various fundamental data 
about the underlying commodity, its supply, its demand, and its movement 
through marketing channels. Especially important are data related to the 
size and ownership of deliverable supplies--the existing supply and the 
future or potential supply, and to the pricing of the deliverable 
commodity relative to the futures price and relative to similar, but 
nondeliverable, kinds of the commodity. For cash-settled markets, it is 
more appropriate to pay attention to the availability and pricing of the 
commodity making up the index to which the market will be settled, as 
well as monitoring the continued suitability of the methodology for 
deriving the index.
    (3) To assess traders' activity and potential power in a market, at 
a minimum, every contract market should have routine access to the 
positions and trading of its market participants and, if applicable, 
should provide for such access through its agreements with its third-
party provider of clearing services. Although clearing member data may 
be sufficient for some contract markets, an effective surveillance 
program for contract markets with substantial numbers of customers 
trading through intermediaries should employ a much more comprehensive 
large-trader reporting system (LTRS).
    Core Principle 5 of section 5(d) of the Act: POSITION LIMITATIONS OR 
ACCOUNTABILITY--To reduce the potential threat of market manipulation or 
congestion, especially during trading in the delivery month, the board 
of trade shall adopt position limitations or position accountability for 
speculators, where necessary and appropriate.
    (a) Application guidance. [Reserved]
    (b) Acceptable practices. (1) In order to diminish potential 
problems arising from excessively large speculative positions, and to 
facilitate orderly liquidation of expiring futures contracts, markets 
may need to set limits on traders' positions for certain commodities. 
These position limits specifically may exempt bona fide hedging, permit 
other exemptions, or set limits differently by markets, by delivery 
months, or by time periods. For purposes of evaluating a contract 
market's speculative-limit program, the Commission considers the 
specified limit levels, aggregation policies, types of exemptions 
allowed, methods for monitoring compliance with the specified levels, 
and procedures for enforcement to deal with violations.
    (2) Provisions concerning speculative position limits are set forth 
in part 150. In general, position limits are not necessary for markets 
where the threat of excessive speculation or manipulation is nonexistent 
or very low. Thus, contract markets do not need to adopt speculative 
position limits for futures markets on major foreign currencies, 
contracts based on certain financial instruments having very liquid and 
deep underlying cash markets, and contracts specifying cash settlement 
where the potential for distortion of such price is negligible. Where 
speculative position limits are necessary, acceptable speculative-limit 
levels typically should be set in terms of a trader's combined position 
in the futures contract plus its position in the related option contract 
(on a delta-adjusted basis).
    (3) A contract market may provide for position accountability 
provisions in lieu of position limits for contracts on financial 
instruments, intangible commodities, or certain tangible commodities. 
Markets appropriate for position accountability rules include those with 
large open-interest, high daily trading volumes and liquid cash markets.
    (4) Spot-month limits should be adopted for markets based on 
commodities having more limited deliverable supplies or where otherwise 
necessary to minimize the susceptibility of the market to manipulation 
or price distortions. The level of the spot limit for physical-delivery 
markets should be based upon an analysis of deliverable supplies and the 
history of spot-month liquidations. Spot-month limits for physical-
delivery markets are appropriately set at no more than 25 percent of the 
estimated deliverable supply. For cash-settled markets, spot-month 
position limits may be necessary if the underlying cash market is small 
or illiquid such that traders can disrupt the cash market or otherwise 
influence the cash-settlement price to profit on a futures position. In 
these cases, the limit should be set at a level that minimizes the 
potential for manipulation or distortion of the futures contract's or 
the underlying commodity's price. Markets may elect not to provide all-
months-combined and non-spot month limits.
    (5) Contract markets should have aggregation rules that apply to 
those accounts under common control, those with common ownership, i.e., 
where there is a ten percent or greater financial interest, and those 
traded according to an express or implied agreement. Contract markets 
will be permitted to set more stringent aggregation policies. For 
example, one major board of trade has adopted a policy of automatically 
aggregating the position of members of the same household, unless they 
were granted a specific waiver. Contract markets may grant exemptions to 
their position limits for bona fide hedging (as defined in Sec. 1.3(z) 
of this chapter) and may grant exemptions for reduced risk positions, 
such as spreads, straddles and arbitrage positions.

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    (6) Contract markets with many products with large numbers of 
traders should have an automated means of detecting traders' violations 
of speculative limits or exemptions. Contract markets should monitor the 
continuing appropriateness of approved exemptions by periodically 
reviewing each trader's basis for exemption or requiring a 
reapplication.
    (7) Contract markets should establish a program for effective 
enforcement of these limits Contract markets should use their LTRS to 
monitor and enforce daily compliance with position limit rules. The 
Commission notes that a contract market may allow traders to 
periodically apply to the contract market for an exemption and, if 
appropriate, be granted a position level higher than the applicable 
speculative limit. The contract market should establish a program to 
monitor approved exemptions from the limits. The position levels granted 
under such hedge exemptions generally are based upon the trader's 
commercial activity in related markets. Contract markets may allow a 
brief grace period where a qualifying trader may exceed speculative 
limits or an existing exemption level pending the submission and 
approval of appropriate justification. A contract market should consider 
whether it wants to restrict exemptions during the last several days of 
trading in a delivery month. Acceptable procedures for obtaining and 
granting exemptions include a requirement that the contract market 
approve a specific maximum higher level.
    (8) Finally, an acceptable speculative limit program should have 
specific policies for taking regulatory action once a violation of a 
position limit or exemption is detected. The contract market policy 
should consider appropriate actions, regardless of whether the violation 
is by a non-member or member, and should address traders carrying 
accounts through more than one intermediary.
    (9) A violation of contract market position limits that have been 
approved by the Commission is also a violation of section 4a(e) of the 
Act. The Commission will consider for approval all contract market 
position limit rules.
    Core Principle 6 of section 5(d) of the Act: EMERGENCY AUTHORITY--
The board of trade shall adopt rules to provide for the exercise of 
emergency authority, in consultation or cooperation with the Commission, 
where necessary and appropriate, including the authority to--(A) 
liquidate or transfer open positions in any contract; (B) suspend or 
curtail trading in any contract; and (C) require market participants in 
any contract to meet special margin requirements.
    (a) Application guidance. A designated contract market should have 
clear procedures and guidelines for contract market decision-making 
regarding emergency intervention in the market, including procedures and 
guidelines to avoid conflicts of interest while carrying out such 
decision-making. A contract market should also have the authority to 
intervene as necessary to maintain markets with fair and orderly trading 
as well as procedures for carrying out the intervention. Procedures and 
guidelines should also include notifying the Commission of the exercise 
of a contract market's regulatory emergency authority, minimizing 
conflicts of interest, and documenting the contract market's decision-
making process and the reasons for using its emergency action authority. 
Information on steps taken under such procedures should be included in a 
submission of a certified rule under Sec. 40.6 of this chapter and any 
related submissions for rule approval pursuant to Sec. 40.5 of this 
chapter, when carried out pursuant to a contract market's emergency 
authority.
    (b) Acceptable practices. As is necessary to address perceived 
market threats, the contract market, among other things, should be able 
to impose position limits in particular in the delivery month, impose or 
modify price limits, modify circuit breakers, call for additional margin 
either from customers or clearing members, order the liquidation or 
transfer of open positions, order the fixing of a settlement price, 
order a reduction in positions, extend or shorten the expiration date or 
the trading hours, suspend or curtail trading on the market, order the 
transfer of customer contracts and the margin for such contracts from 
one member including non-intermediated market participants of the 
contract market to another, or alter the delivery terms or conditions, 
or, if applicable, should provide for such actions through its 
agreements with its third-party provider of clearing services.
    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 information concerning-
-(A) the terms and conditions of the contracts of the contract market; 
and (B) the mechanisms for executing transactions on or through the 
facilities of the contract market.
    (a) Application guidance. A designated contract market should have 
arrangements and resources for the disclosure of contract terms and 
conditions and trading mechanisms to the Commission, market participants 
and the public. Procedures should also include providing information on 
listing new products, rule amendments or other changes to previously 
disclosed information to the Commission, market participants and the 
public. Provision of all such information to market participants and the 
public could be by timely placement of the information on a contract 
market's web site.
    (b) Acceptable practices. [Reserved]
    Core Principle 8 of section 5(d) of the Act: DAILY PUBLICATION OF 
TRADING

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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) Application guidance. A contract market should provide to the 
public information regarding settlement prices, price range, volume, 
open interest and other related market information for all actively 
traded contracts, as determined by the Commission, on a fair, equitable 
and timely basis. The Commission believes that section 5(d)(8) requires 
contract markets to publicize trading information for any non-dormant 
contract. Provision of information for any applicable contract could be 
through such means as provision of the information to a financial 
information service and by timely placement of the information on a 
contract market's web site.
    (b) Acceptable practices. [Reserved]
    Core Principle 9 of section 5(d) of the Act: EXECUTION OF 
TRANSACTIONS--The board of trade shall provide a competitive, open, and 
efficient market and mechanism for executing transactions.
    (a) Application guidance. (1) A competitive, open and efficient 
market and mechanism for executing transactions includes a board of 
trade's methodology for entering orders and executing transactions.
    (2) Appropriate objective testing and review of any automated 
systems should occur initially and periodically to ensure proper system 
functioning, adequate capacity and security. A designated contract 
market's analysis of its automated system should address appropriate 
principles for the oversight of automated systems, ensuring proper 
system function, adequate capacity and security. The Commission believes 
that the guidelines issued by the International Organization of 
Securities Commissions (IOSCO) in 1990 (which have been referred to as 
the ``Principles for Screen-Based Trading Systems''), and adopted by the 
Commission on November 21, 1990 (55 FR 48670), as supplemented in 
October 2000, are appropriate guidelines for a designated contract 
market to apply to electronic trading systems. Any program of objective 
testing and review of the system should be performed by a qualified 
independent professional. The Commission believes that information 
gathered by analysis, oversight or any program of objective testing and 
review of any automated systems regarding system functioning, capacity 
and security should be made available to the Commission.
    (3) A designated contract market that determines to allow block 
trading should ensure that the block trading does not operate in a 
manner that compromises the integrity of prices or price discovery on 
the relevant market.
    (b) Acceptable practices. A professional that is a certified member 
of the Information Systems Audit and Control Association experienced in 
the industry would be an example of an acceptable party to carry out 
testing and review of an electronic trading system.
    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 for 
purposes of assisting in the prevention of customer and market abuses 
and providing evidence of any violations of the rules of the contract 
market.
    (a) Application guidance. A designated contract market should have 
arrangements and resources for recording of full data entry and trade 
details and the safe storage of audit trail data. A designated contract 
market should have systems sufficient to enable the contract market to 
use the information for purposes of assisting in the prevention of 
customer and market abuses through reconstruction of trading.
    (b) Acceptable practices. (1) The goal of an audit trail is to 
detect and deter customer and market abuse. An effective contract market 
audit trail should capture and retain sufficient trade-related 
information to permit contract market staff to detect trading abuses and 
to reconstruct all transactions within a reasonable period of time. An 
audit trail should include specialized electronic surveillance programs 
that would identify potentially abusive trades and trade patterns, 
including, for instance, withholding or disclosing customer orders, 
trading ahead, and preferential allocation. An acceptable audit trail 
must be able to track a customer order from time of receipt through fill 
allocation or other disposition. The contract market must create and 
maintain an electronic transaction history database that contains 
information with respect to transactions executed on the designated 
contract market.
    (2) An acceptable audit trail should include the following: original 
source documents, transaction history, electronic analysis capability, 
and safe storage capability. A contract market whose audit trail 
satisfies the following acceptable practices would satisfy Core 
Principle 10.
    (i) Original source documents. Original source documents include 
unalterable, sequentially identified records on which trade execution 
information is originally recorded, whether recorded manually or 
electronically. For each customer order (whether filled, unfilled or 
cancelled, each of which should be retained or electronically captured), 
such records reflect the terms of the order, an account identifier that 
relates back to the account(s) owner(s), and the time of

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order entry. (For floor-based contract markets, the time of report of 
execution of the order should also be captured.)
    (ii) Tansaction history. A transaction history which consists of an 
electronic history of each transaction, including (a) all data that are 
input into the trade entry or matching system for the transaction to 
match and clear; (b) the categories of participants for which such 
trades are executed, including whether the person executing a trade was 
executing it for his/her own account or an account for which he/she has 
discretion, his/her clearing member's house account, the account of 
another member, including market participants present on the floor, or 
the account of any other customer; (c) timing and sequencing data 
adequate to reconstruct trading; and (d) the identification of each 
account to which fills are allocated.
    (iii) Electronic analysis capability. An electronic analysis 
capability that permits sorting and presenting data included in the 
transaction history so as to reconstruct trading and to identify 
possible trading violations with respect to both customer and market 
abuse.
    (iv) Safe storage capability. Safe storage capability provides for a 
method of storing the data included in the transaction history in a 
manner that protects the data from unauthorized alteration, as well as 
from accidental erasure or other loss. Data should be retained in 
accordance with the recordkeeping standards of Core Principle 17.
    Core Principle 11 of section 5(d) of the Act: FINANCIAL INTEGRITY OF 
CONTRACTS--The board of trade shall establish and enforce rules 
providing for the financial integrity of any contracts traded on the 
contract market (including the clearance and settlement of the 
transactions with a derivatives clearing organization), and rules to 
ensure the financial integrity of any futures commission merchants and 
introducing brokers and the protection of customer funds.
    (a) Application guidance. Clearing of transactions executed on a 
designated contract market other than transactions in security futures 
products, should be provided through a Commission-registered derivatives 
clearing organization. In addition, a designated contract market should 
maintain the financial integrity of its transactions by maintaining 
minimum financial standards for its members and non-intermediated market 
participants and by having default rules and procedures. The minimum 
financial standards should be monitored for compliance purposes. The 
Commission believes that in order to monitor for minimum financial 
requirements, a designated contract market should routinely receive and 
promptly review financial and related information from its members. 
Rules concerning the protection of customer funds should address the 
segregation of customer and proprietary funds, the custody of customer 
funds, the investment standards for customer funds, related 
recordkeeping and related intermediary default procedures. The contract 
market should audit its members that are intermediaries for compliance 
with the foregoing rules as well as applicable Commission rules. These 
audits should be conducted consistent with the guidance set forth in 
Division of Clearing and Intermediary Oversight Interpretations 4-1 and 
4-2. A contract market may delegate to a designated self-regulatory 
organization responsibility for receiving financial reports and for 
conducting compliance audits pursuant to the guidelines set forth in 
Sec. 1.52 of this chapter.
    (b) Acceptable Practices. [Reserved]
    Core Principle 12 of section 5(d) of the Act: PROTECTION OF MARKET 
PARTICIPANTS--The board of trade shall establish and enforce rules to 
protect market participants from abusive practices committed by any 
party acting as an agent for the participants.
    (a) Application guidance. A designated contract market should have 
rules prohibiting conduct by intermediaries that is fraudulent, 
noncompetitive, unfair, or an abusive practice in connection with the 
execution of trades and a program to detect and discipline such 
behavior. The contract market should have methods and resources 
appropriate to the nature of the trading system and the structure of the 
market to detect trade practice abuses.
    (b) Acceptable practices. [Reserved]
    Core Principle 13 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) Application guidance. A designated contract market should 
provide customer dispute resolution procedures that are fair and 
equitable and make them 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) Under Core Principle 13, a designated 
contract market is required to provide for dispute resolution mechanisms 
that are appropriate to the nature of the market.
    (2) In order to satisfy acceptable standards, a designated contract 
market should provide a customer dispute resolution mechanism that is 
fundamentally fair and is 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 decision-maker,
    (ii) Provide each party with the right to be represented by counsel, 
at the party's own expense,

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    (iii) Provide each party with adequate notice of the claims 
presented against him or her, 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 contract market, and
    (v) Notify the parties of the fees and costs that may be assessed.
    (3) The use of such procedures should be voluntary for customers who 
are not eligible contract participants, and could permit counterclaims 
as provided in Sec. 166.5 of this chapter.
    (4) If the designated contract market also provides a procedure for 
the resolution of disputes that do not involve customers (i.e., member-
to-member disputes), the procedure for resolving such disputes must be 
independent of and shall not interfere with or delay the resolution of 
customers' claims or grievances.
    (5) 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, if the designated contract market does delegate 
that responsibility, the contract market shall in all respects treat any 
decision issued by such other organization or association as if the 
decision were its own including providing for the appropriate 
enforcement of any award issued against a delinquent member.
    Core Principle 14 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 persons with direct access 
to the facility (including any parties affiliated with any of the 
persons described in this core principle).
    (a) Application 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 Sec. 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) Acceptable practices. [Reserved]
    Core Principle 15 of section 5(d) of the Act: CONFLICTS OF INTEREST-
-The board of trade shall establish and enforce rules to minimize 
conflicts of interest in the decision making process of the contract 
market and establish a process for resolving such conflicts of interest.
    (a) Application guidance. The means to address conflicts of interest 
in decision-making 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. [Reserved]
    Core Principle 16 of section 5(d) of the Act: COMPOSITION OF BOARDS 
OF MUTUALLY OWNED CONTRACT MARKETS--In the case of a mutually owned 
contract market, the board of trade shall ensure that the composition of 
the governing board reflects market participants.
    (a) Application guidance. The composition of a mutually-owned 
contract market should fairly represent the diversity of interests of 
the contract market's market participants.
    (b) Acceptable practices. [Reserved]
    Core Principle 17 of section 5(d) of the Act: RECORDKEEPING--The 
board of trade shall maintain records of all activities related to the 
business of the contract market in a form and manner acceptable to the 
Commission for a period of 5 years.
    (a) Application guidance. [Reserved]
    (b) Acceptable practices. Section 1.31 of this chapter governs 
recordkeeping obligations

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under the Act and the Commission's regulations thereunder. In order to 
provide broad flexible performance standards for recordkeeping, 
Sec. 1.31 was updated and amended by the Commission in 1999. 
Accordingly, Sec. 1.31 itself establishes the guidance regarding the 
form and manner for keeping records.
    Core Principle 18 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 endeavor to avoid--(A) adopting 
any rules or taking any actions that result in any unreasonable 
restraints of trade; or (B) imposing any material anticompetitive burden 
on trading on the contract market.
    (a) Application 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]

[66 FR 42277, Aug. 10, 2001, as amended at 67 FR 62352, Oct. 7, 2002]