CFTC Final Rule: Core Principles and Other Requirements for Designated Contract Markets
|FINAL RULE: Approved at CFTC Open Meeting, May 10, 2012.|
|Final Rule Issue||Effective Date||Compliance Date|
|June 19, 2012||August 20, 2012||October 17, 2012|
At its May 10, 2012 open meeting, the CFTC approved a final rulemaking that outlined the core principles and other requirements of designated contract markets (DCMs).<ref>CFTC to Hold Open Meeting to Consider a Final Rule on Core Principles and Other Requirements for Designated Contract Markets and a Proposed Order Amending the Effective Date for Swap Regulation. CFTC. Retrieved on May 14, 2012.</ref> In general, the core principles are a codification of standard industry practices that the CFTC has determined to be acceptable compliance practices. The rules are meant to provide legal certainty and standardization among industry practices.<ref>Core Principles and Other Requirements for Designated Contract Markets; Final Rule. Federal Register. Retrieved on June 19, 2012.</ref>
- eliminating the existing eight requisite criteria for DCM registration;
- amending the core principles to incorporate most of the eight former listing criteria; and
- adding five new core principles covering disciplinary procedures, system safeguards, financial resources, diversity, and SEC harmonization.
Summary of the Rule
The final rules incorporate the new and amended rules, guidance, acceptable practices, and 23 core principles. They also incorporate the trading and execution of swaps on DCMs. The core principles fall under five general guidelines:
- Financial information and resource requirements;
- Compliance obligations;
- Operational capabilities;
- Surveillance obligations; and
- Trading and products requirements.<ref>Fact Sheet: Final Rulemaking Regarding Core Principles and Other Requirements for Designated Contract Markets (PDF). CFTC. Retrieved on May 10, 2012.</ref>
The final rules also included several new requirements for DCMs:
- "The rules eliminate the ninety-day accelerated approval procedures for DCM applications and require that all applications for designation as a contract market be reviewed within 180 days, as required under the CEA.
- To streamline the application process, the rulemaking includes, under Part 38, a new DCM application form with a comprehensive list of instructions and documents that must accompany applications for designation as a contract market.
- To prevent market disruption, the rules require that DCMs implement trade risk control mechanisms, including pauses and halts to trading, under certain conditions.
- The rules require DCMs to meet specified financial resource requirements.
- The rules require DCMs to establish operational and system safeguard requirements.
- The rules describe specific requirements for DCMs that list swaps, including reporting and recordkeeping requirements."<ref>Q & A – Core Principles and Other Requirements for Designated Contract Markets (PDF). CFTC. Retrieved on May 10, 2012.</ref>
A summary of the 23 core principles begins on page 90 of the Federal Register entry below. Note: The final rule does not yet finalize a proposed provision that would require either the delisting or "reclassification" of any contract in which less than 85 percent of its volume occurs on a central order book, the so-called "85 percent Rule." <ref>U.S. derivatives industry slams CFTC's 85 pct rule. Reuters. Retrieved on June 5, 2012.</ref> This aspect of DCM core principles will be addressed in a future rulemaking. For more information, click HERE.
Addition to Mandatory Clearing Section, June 25, 2012
On June 25, 2012, a paragraph was added to Rule 38.601, mandatory clearing. The addition is as follows:
"A designated contract market must coordinate with each derivatives clearing organization to which it submits transactions for clearing, in the development of rules and procedures to facilitate prompt and efficient transaction processing in accordance with the requirements of § 39.12(b)(7) of this chapter."
Related Documents: Fact Sheet, Q&A, Federal Register Entry and Correction