1 RECOMMENDATION C: ENHANCE CFTC AUTHORITY OVER

2 EXCHANGE COMPLIANCE WITH THE CEA

4 [Recommendation: The Report recommends legislation to enhance CFTC authority over

5 exchange and clearinghouse compliance with the Commodity Exchange Act (CEA). The CEA

6 should be amended to: (i) clarify the CFTC's rulemaking authority to determine the appropriate

7 manner by which an exchange or clearinghouse may comply with the CEA; (ii) provide an

8 appropriate period of time for the CFTC to review new and amended rules, andproducts that

9 may violate public policy, that are proposed by an exchange or clearinghouse; and (iii) provide

10 the CFTC with clear authority to bring an enforcement action against an exchange or

11 clearinghouse for violation ofa core principle in the same manner as it would any other

12 enforcement action alleging a violation ofthe CEA or CFTC rules. To provide greater oversight

13 authority, the CEA should be amended to provide, as does Section 19(b) of the Securities

14 Exchange Act of 1934 with respect to the SEC's authority, that the CFTC shall disapprove a

15 proposed rule unless it finds that the change is consistent with the statute and regulations.]

16

17 (a) Section 5(d)(I) of the Commodity Exchange Act (7 US.c. 7(d)), is amended to read as

18 follows:

19 "(1) IN GENERAL.-To be designated as, and to maintain the designation of a

20 board of trade as a contract market, the board of trade shall comply with the core

21 principles specified in this subsection and any requirement that the Commission may

22 impose by rule or regulation pursuant to section 8a(5). Except where the Commission

23 determines otherwise by rule or regulation, the board of trade shall have reasonable

24 discretion in establishing the manner in which it complies with the core principle.".

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 1 (b) Section 5b(c)(2)(A) of the Commodity Exchange Act (7 US.C. 7a-l(c)(2)(A)), is amended to

2 read as follows:

3 "(A) IN GENERAL.-To be registered and to maintain registration as a

4 derivatives clearing organization, a derivatives clearing organization shall

5 comply with the core principles specified in this paragraph and any requirement

6 that the Commission may impose by rule or regulation pursuant to section 8a(5).

7 Except where the Commission determines otherwise by rule or regulation, a

8 derivatives clearing organization shall have reasonable discretion in establishing

9 the manner in which it complies with the core principles.".

10 (c) Section 5c(a)(2) of the Commodity Exchange Act (7 US.C. 7a-2(a)(2)) is amended to read as

11 follows:

12 "(1) EFFECT OF INTERPRETATION.-An interpretation issued under paragraph (1)

13 may provide the exclusive means for complying with such sections.".

14 (d) Section 5c(c)(I) of the Commodity Exchange Act (7 US.C. 7a-2(c)(I)) is amended:

15 (1) by inserting "(A)" after "IN GENERAL.-" and

16 (2) by adding at the end the following:

17 "(B) RULE REVIEw.-The new rule or rule amendment shall become

18 effective, pursuant to the certification of the registered entity, 10 business days

19 after the date on which the Commission receives the certification (or such shorter

20 period as determined by the Commission by rule or regulation) unless the

21 Commission notifies the registered entity during that period that the Commission

22 is staying the certification due to-

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 1 "(i) novel or complex issues that require additional time to analyze;

2 "(ii) an inadequate explanation by the submitting registered

3 entity; or

4 "(iii) a potential inconsistency with this Act (including regulations

5 under this Act).

6 "(C) STAY OF RULE ORRULE AMENDMENT.-A notification by the

7 Commission pursuant to subparagraph (B) shall stay the certification of the new

8 rule or new amendment for up to an additional 90 days from the date of the

9 notification.

10 "(D) NEW CONTRACT REVIEw.-The new contract or instrument or

11 clearing of the new contract or instrument shall become effective, pursuant to the

12 registered entity's certification, 10 business days after the Commission's receipt

13 of the certification (or such shorter period determined by the Commission by rule

14 or regulation) unless the Commission notifies the registered entity within such

15 time that it is staying the certification because transactions in the new contract or

16 instrument may violate public policy.

17 "(E) PUBLIC POLICY DEFINED.-For purposes of subparagraph (D),

18 transactions in a new contract or instrument violate public policy if the new

19 contract or instrument involves-

20 "(i) activity that is unlawful under any Federal or State law;

21 "(ii) terrorism;

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 1 "(iii) assassination;

2 "(iv) war; or

3 "(v) other similar activity determined by the Commission, by rule

4 or regulation, to be contrary to the public interest.

5 "(F) STAY OF NEW CONTRACT.-A notification by the Commission

6 pursuant to subparagraph (D) shall stay the certification of the new contract or

7 instrument or clearing of the new contract or instrument for up to an additional 60

8 days from the date of the notification.

9 "(G) PROHIBITION.-Ifthe Commission determines that transactions in the

10 new contract or instrument would violate public policy, as defined under

11 subparagraph (E), the registered entity shall not list for trading or clear the

12 contract or instrument.

13 "(H) PRIVACY.-The Commission shall limit the public availability of any

14 information received from the registered entity regarding the new contract or

15 instrument or clearing of the new contract or instrument during the pendency of

16 the review under subparagraph (D) and any stay under subparagraph (F) if the

17 registered entity submits a written request to limit disclosure contemporaneous

18 with the written certification.".

19 (e) Section 5c(c)(3) of the Commodity Exchange Act (7 U.S.C. 7a-2(c)(3)) is amended to read as

20 follows:

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1 "(3) The Commission shall disapprove a new rule or rule amendment of a

2 registered entity, or a new contract or other instrument submitted for prior approval

3 pursuant to paragraph (2), if it does not find that the new rule, rule amendment, or new

4 contract or instrument is consistent with the requirements of this Act and regulations

5 thereunder." .

6 (f) Section 5c(d) of the Commodity Exchange Act (7 U.S.C. 7a-2(d)) is repealed.

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