Account Ownership and Control Report, 41775-41787 [2010-17530]

Agencies

• Commodity Futures Trading Commission

[Federal Register Volume 75, Number 137 (Monday, July 19, 2010)]
[Proposed Rules]
[Pages 41775-41787]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-17530]


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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 16

RIN 3038-AC63


Account Ownership and Control Report

AGENCY: Commodity Futures Trading Commission.

[[Page 41776]]


ACTION: Notice of proposed rulemaking (``Notice'').

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'' or 
``Commission'') hereby proposes to collect certain ownership, control, 
and related information for all trading accounts active on U.S. futures 
exchanges and other reporting entities. The information collected will 
enhance market transparency, increase the Commission's trade practice 
and market surveillance capabilities, leverage existing surveillance 
systems and data, and facilitate the Commission's enforcement and 
research programs. Upon adoption of a final rule, the Commission will 
codify its requirements in Commission Regulation 16.03. The Commission 
welcomes public comments on its proposal.

DATES: Comments must be received on or before September 17, 2010. The 
Commission or Commission staff will hold a public meeting during the 
comment period in order to discuss the proposed rulemaking.

ADDRESSES: Comments should be sent to David Stawick, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments may be submitted via e-mail 
at OCR@cftc.gov. ``Account Ownership and Control Report'' must be in 
the subject field of responses submitted via e-mail, and clearly 
indicated on written submissions. Comments may also be submitted by 
connecting to the Federal eRulemaking Portal at https://www.regulations.gov and following comment submission instructions. All 
comments must be in English.

FOR FURTHER INFORMATION CONTACT: Sebastian Pujol Schott, Associate 
Deputy Director, Market Compliance, 202-418-5641, or Cody J. Alvarez, 
Attorney Advisor, 202-418-5404, Division of Market Oversight, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
NW., Washington, DC 20581.

SUPPLEMENTARY INFORMATION:

I. Background

    The Commission proposes to collect ownership and control 
information via an account ``Ownership and Control Report'' (``OCR'') 
submitted weekly by all U.S. futures exchanges and other reporting 
entities (collectively, ``reporting entities'').\1\ This Notice 
specifies the proposed content of the OCR, as well as its form and 
manner. In addition, it summarizes public comments received in response 
to a previously published Advanced Notice of Proposed Rulemaking 
(``ANPR'') in which the Commission explained its need and intended uses 
for ownership and control information.
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    \1\ ``Reporting entities'' are defined broadly to include any 
registered entity required to provide the Commission with trade data 
on a regular basis, where such data is used for the Commission's 
trade practice or market surveillance programs. At present, 
reporting entities would include designated contract markets 
(``DCMs''), derivatives transaction execution facilities 
(``DTEFs''), and exempt commercial markets with significant price 
discovery contracts (``ECM SPDCs''). In addition, should the 
Commission adopt the proposed rule, it would also collect ownership 
and control information from foreign boards of trade (``FBOTs'') 
operating in the U.S. pursuant to staff direct access no-action 
letters if such letters are conditioned on the regular reporting of 
trade data to the Commission. The Commission notes that much of the 
data required in the proposed OCR is already maintained by one or 
more registered entities to comply with existing regulatory 
requirements. The OCR will necessitate each reporting entity to 
collate and correlate these and other data points into a single 
record for trading accounts active on its trading facility, and to 
transmit such record to the Commission for regulatory purposes.
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A. Advanced Notice of Proposed Rulemaking

    On July 2, 2009, the Commission published for public comment an 
ANPR where it proposed to collect certain ownership, control, and 
related information for all trading accounts active on U.S. futures 
exchanges. The Commission stated its intention to collect this 
information via an OCR submitted periodically by DCMs and other 
reporting entities.\2\ The ANPR was not a formal rule proposal; 
however, it did provide a detailed explanation of the Commission's need 
and intended uses for ownership and control information. The ANPR 
explained that the OCR would be designed to enhance market 
transparency, leverage the Commission's existing surveillance systems, 
and foster synergies between its market surveillance, trade practice, 
enforcement, and economic research programs. In addition, it addressed 
key technical points, including: (1) The data that the Commission 
planned to collect through OCRs; (2) the frequency with which OCRs were 
to be submitted; and (3) the form and manner in which OCRs should be 
provided. Finally, the ANPR gave examples of the Commission's intended 
uses for ownership and control information, and described existing 
Commission surveillance systems that would benefit from OCRs.
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    \2\ 74 FR 31642 (July 2, 2009). The ANPR noted that ``most 
reporting entities will be designated contract markets, but they 
could be any registered entity that provides trade data to the 
Commission on a regular basis.'' Footnote 1, above, emphasizes that 
reporting entities are not limited to DCMs.
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    The Commission invited all interested parties to submit general 
comments on the OCR within a 45-day comment window.\3\ In addition, it 
posed eight specific questions addressing what additional information, 
if any, should be included in the OCR; the root sources of ownership 
and control information; the flow of data from those sources through 
reporting entities and on to the Commission; the form and manner of OCR 
transmission; the costs and burdens that the OCR might impose on 
reporting entities and their root data sources; and related matters. 
The Commission stated that comments received in response to the ANPR 
would help it ``formulate an effective and practical rule,'' and that 
comments would be ``used in developing a proposed rule at a later 
date.'' \4\ The Commission received a total of 12 comment letters from 
16 interested parties.
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    \3\ Comments were due on or before August 17, 2009.
    \4\ 74 FR 31642, at 31646 and 31643.
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    All comment letters were reviewed carefully by Commission staff. 
They expressed a range of opinions, both in support and opposition to 
the OCR. Many comment letters understood the utility of gathering 
ownership and control information for at least some trading accounts, 
but questioned specific elements of the Commission's approach as 
outlined in the ANPR. The comments received and the Commission's 
responses are summarized in Section III below. Briefly stated, however, 
the Commission continues to believe that ownership and control 
information is fundamental to the effective regulation of 21st-century 
futures markets. While it has made some modifications in response to 
comments received, and also added several new data points, the 
Commission is now formally proposing the OCR largely as described in 
the ANPR.\5\ The Commission welcomes all public comments.
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    \5\ For example, the proposed OCR does not require the last four 
digits of account owners' and controllers' social security numbers 
or taxpayer identification numbers, as was contemplated in the ANPR. 
In their place, however, it would collect account owners' and 
controllers' dates of birth, as well as their National Futures 
Association (``NFA'') identification numbers, if any. The proposed 
OCR's complete data requirements are described in Section IV(A).
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II. Ownership and Control Information as a Regulatory Tool

A. Commission's Need for the OCR

    The Commission's need for ownership and control information 
reflects fundamental changes in the technology, products, and platforms 
of

[[Page 41777]]

U.S. futures trading. DCMs, in particular, have undergone a decade-long 
transition from geographically-defined trading pits to electronic 
platforms with global reach. Between 2000 and 2009, electronic trading 
grew from approximately 9 percent to approximately 81 percent of volume 
on all U.S. DCMs. Over the same time period, the number of actively-
traded futures and options contracts listed on U.S. exchanges increased 
more than seven fold, from approximately 266 contracts in 2000 to 
approximately 1,866 contracts in 2009.\6\ Most importantly, total DCM 
futures and options trading volume rose from approximately 594.5 
million contracts in 2000 to approximately 2.78 billion in 2009, an 
increase of over 368%.\7\
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    \6\ Based on fiscal years 2000 and 2009, as reported in the 
Commission's FY 2009 Performance and Accountability Report, p.14.
    \7\ In addition, futures and options trading volume reached a 
peak of approximately 3.37 billion contracts traded in 2008, an 
increase of over 466% compared to the year 2000.
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    Volume growth and changes in trading technology have coincided with 
equally important developments in the business of futures trading. One 
development of significant regulatory consequence is the growing 
economic integration between DCM contracts and their equivalents traded 
on ECMs, FBOTs, or other DCMs. Such linkages present both new trading 
opportunities and new regulatory challenges for the Commission and 
exchanges. In particular, both must be vigilant that trading in one 
market is not used to distort another, or to facilitate abusive trading 
practices across markets. The Commission's role with respect to such 
linked contracts is especially vital, as it is best equipped to collect 
regulatory information from competing exchanges and conduct 
surveillance of linked contracts across markets.
    A second development of regulatory consequence is the increased 
dispersion and opacity of market participants as U.S. exchange floors 
are replaced by a broader, global customer base. Whereas the Commission 
once monitored trading via on-site surveillance of open-outcry pits, 
today surveillance is primarily electronic and data-driven. 
Paradoxically, while electronic trading has conferred important 
informational advantages, including improved audit trails, the 
concomitant increases in trading volumes, products offered, and trader 
dispersion and anonymity have created equally important regulatory 
challenges. Foremost among these is scale. Effective surveillance of 
millions of daily records--for example, an average of approximately 2.9 
million trades per day in December 2009--requires automated systems 
capable of intelligently searching for patterns and anomalies buried 
deep within the data. Crucially, it also requires comprehensive data 
streams with sufficient reference points to uncover relationships where 
none appear to exist and to analyze information based on desired 
criteria. The proposed OCR helps both the Commission and self-
regulatory organizations accomplish these tasks by adding account 
control, account ownership, and common control or ownership as new 
reference points for trade practice and market surveillance programs.
    Taken together, these and other changes have transformed regulation 
and self-regulation in the futures industry. The Commission has worked 
diligently to keep pace in every respect. Its efforts have included the 
assertion of jurisdiction where appropriate, and the acquisition of 
regulatory data--such as the proposed OCR--from all necessary sources. 
In March 2009, for example, the Commission adopted final rules with 
respect to significant price discovery contracts (``SPDCs'') traded on 
ECMs, which, in some cases, have grown from nascent trading facilities 
to large electronic trading platforms listing contacts that rival DCM 
contracts and contracts that serve a significant price discovery 
function.\8\ The final rules address concerns that trading in SPDCs, if 
insufficiently regulated, could adversely impact the contracts to which 
they are linked or the parties that refer to SPDCs for the pricing of 
transactions. The final rules also describe, in guidance, how the 
Commission expects to apply the statutory criteria for determining 
whether an ECM contract serves a significant price discovery 
function.\9\ Once such a determination is made, SPDCs become subject to 
nine core principle requirements, including the provision of regulatory 
data to the Commission. As of June 28, 2010, eight ECM contracts have 
been recognized as SPDCs.\10\ In another example, Commission staff has 
twice amended its direct access no-action letter for an FBOT offering 
DCM-linked contract(s), ultimately requiring additional regulatory 
data, including large trader reports and trade execution and audit 
trail data with respect to the linked contract(s).\11\
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    \8\ Final rules were adopted on March 23, 2009 and became 
effective April 22, 2009. See 74 FR 12178.
    \9\ The criteria established by Section 2(h)(7) of the Act 
include price linkage and arbitrage relationships with other 
contracts, material price reference, and material liquidity.
    \10\ See for example 74 FR 37988 (July 30, 2009) (wherein the 
ICE Henry Financial LD1 Fixed Price contract became the first 
contract found by the Commission to perform a significant price 
discovery function).
    \11\ See Letter from Richard A. Shilts, Director, Division of 
Market Oversight, to Dee Blake, Director of Regulation, ICE Futures 
Europe (June 17, 2008) (requiring, among other things, that ICE 
Futures Europe provide a daily report of large trader positions in 
each linked contract). On January 21, 2009, the Commission published 
a Notice in the Federal Register to provide notice that the 
conditions set forth in the staff no-action letter dated June 17, 
2008, would equally apply to no-action relief of any FBOT that lists 
for trading by direct access from the U.S. any linked contract. 74 
FR 3570, 3572 (January 21, 2009). See also Letter from Richard A. 
Shilts, Director, Division of Market Oversight, to Dee Blake, 
Director of Regulation, ICE Futures Europe (August 20, 2009) 
(requiring, among other things, that ICE Futures Europe provide 
trade execution and audit trail data for the CFTC's Trade 
Surveillance System on a trade-date plus one basis).
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    The Commission has also worked diligently to modernize its 
automated surveillance systems and to upgrade the data sources 
available for those systems. In many cases, the Commission already 
receives the information it requires for effective regulation, 
including large trader reports for market surveillance and exchange 
trade registers for trade practice surveillance.\12\ The proposed OCR 
is intended to integrate these existing resources, and leverage them in 
dynamic new ways. As explained below, it would improve the Division of 
Market Oversight's (``DMO'') detection and deterrence capabilities with 
respect to specific trade practice violations and market abuses. It 
would also help bridge the gap between individual transactions reported 
to the Commission on exchange trade registers and aggregate positions 
reported to it in large trader data.
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    \12\ ``Trade register'' is a generic term for a comprehensive, 
daily record of every trade facilitated by an exchange, whether 
executed on the centralized market (via open-outcry or 
electronically) or off of it (e.g., block trades and exchange of 
futures for swaps). Trade registers contain detailed information 
with respect to the terms of a trade (e.g., contract, price, 
quantity, etc.), the parties involved, and other data points. They 
also contain trading account numbers, but no information with 
respect to the owners or controllers of those accounts. In addition, 
the trading account numbers in trade registers often do not 
correspond to account numbers reported to other Commission data 
systems, including its large trader reporting system. The Commission 
has recently standardized the content and format of all trade 
registers submitted to it, which are now required to be FIXML Trade 
Capture Reports. The Commission notes that OCR reporting 
requirements will be triggered by the regular reporting of trade 
data for use in the Commission's trade practice or market 
surveillance programs, regardless of whether such data is deemed a 
``trade register'' by the entity providing it.
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    The OCR would allow the Commission's Division of Enforcement 
(``DOE'') and its Office of Chief Economist (``OCE'') to better and 
more efficiently utilize regulatory data in support of their own 
missions. In addition, it would increase market

[[Page 41778]]

transparency and respond to new regulatory data needs in an era of 
predominantly electronic trading. In short, the proposed OCR reflects 
the Commission's belief that its traditional data resources--exchange 
trade registers and large trader reports--must be expanded. 
Accordingly, the Commission proposes to supplement those resources with 
ownership and control information for all trading accounts.

B. Specific Benefits Expected From the OCR

1. Benefits to DMO's Trade Practice and Market Surveillance Programs
    The Commission's primary responsibility is to ensure that U.S. 
futures markets accurately reflect the underlying forces of supply and 
demand for all products traded, and that futures markets are free from 
fraud and abuse. DMO monitors all futures and option markets to detect 
and prevent price manipulation, abusive trading practices, and customer 
harm. It is concerned with both market-wide abuses, such as 
manipulation (i.e., market surveillance) and individual trading 
violations (i.e., trade practice surveillance); often, the two are 
connected. DMO's surveillance programs include routine monitoring of 
markets and trades, and detailed, data-driven investigations when 
appropriate.
    To conduct its surveillance programs, DMO collects daily trade data 
from all U.S. DCMs or their regulatory service providers, as well as 
from ECMs with SPDCs and FBOTs with linked contracts. The data 
collected is central to DMO's trade practice surveillance program, and 
of growing importance to market surveillance and other regulatory 
efforts, as explained below. Presently, the Commission's trade practice 
and market surveillance programs utilize distinct platforms--the 
Integrated Surveillance System (``ISS'') for market surveillance and 
the Trade Surveillance System (``TSS'') for trade practice 
surveillance.\13\
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    \13\ ISS tools and data are used to detect and prevent price 
manipulation and market congestion on regulated exchanges, and to 
enforce speculative position limits pursuant to section 4a of 
Commodity Exchange Act (``Act''). ISS receives data from reporting 
firms via large trader reports filed daily with the Commission. 
Large trader reports show open end-of-day positions in futures and 
options that are at or above specific reporting levels set by the 
Commission (``large traders''). Related accounts are aggregated by 
reporting firms and given a ``special account number'' which DMO 
uses to track their consolidated end of day positions. Like ISS, TSS 
is also a combination of analytical tools and databases. It also 
includes powerful algorithms to analyze large quantities of trade 
data for suspicious trading patterns. TSS forms the backbone of the 
Commission's automated trade practice surveillance program and also 
provides data and analysis for Commission enforcement and research 
programs, as described below.
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    Broadly speaking, ISS facilitates the storage, analysis, and mining 
of large trader data while TSS does the same for trade data. Both 
systems include a range of tools for automated surveillance, pattern 
detection, ad hoc examination of raw data, and investigation. One 
valuable benefit of the OCR is that it would help integrate these two 
primary systems by linking individual transactions reported on exchange 
trade registers (TSS) with aggregate positions reported in large trader 
data (ISS). DMO would have the data necessary to reconstruct trading 
based on trade registers, and determine how large traders established 
their positions as recorded in the large trader reporting system.
    One important benefit of the OCR is that it would help TSS to make 
more sophisticated analytical use of the trade register data already 
available. As indicated previously, ``trade register'' is a generic 
term for a comprehensive, daily record of every trade facilitated by an 
exchange. Trade registers contain detailed information with respect to 
the terms of a trade, but no OCR-type data. Together, TSS and exchange 
trade registers aid in the detection, analysis, and investigation of 
numerous abusive trading practices, including trading ahead of customer 
orders, wash trading, pre-arranged trading, money-passing, and other 
trade practice violations.
    To identify these violations and others that may arise in the 
future, DMO's trade practice analysts, equipped with TSS, must 
distinguish violative trading patterns hidden within extremely large 
data sets. However, TSS's analytical capabilities are proportional to 
the content of its source data, which presently does not include 
ownership and control information sufficient to aggregate related 
trading accounts within and across exchanges. This absence of ownership 
and control information impairs DMO's ability to efficiently detect 
trade practice violations such as those listed above, or to uncover 
other violations that would be evident with ownership and control 
information. For example, instances of potential money-passing 
(including money laundering) become much more evident when two 
apparently unrelated accounts with frequent trading activity are known 
to be under common ownership. In addition, the absence of ownership and 
control information impairs DMO's ability to identify small and medium 
sized traders whose open interest does not reach reportable levels, but 
who can still have deleterious effects on the markets during 
concentrated periods of intra-day trading. Such scenarios include 
intra-day position limit violations and ``banging the close'' 
manipulations. The OCR would allow DMO to addresses each of these 
current limitations.
2. Benefits to the Division of Enforcement
    DOE investigates and prosecutes alleged violations of the Act and 
Commission regulations.\14\ It can act against any number of persons 
and entities suspected of such violations, including individuals and 
firms registered with the Commission, those who are engaged in 
commodity futures and option trading on designated domestic exchanges, 
and those who improperly market futures and options contracts. DOE 
proceedings typically begin with careful investigations based on leads 
developed internally or information referred by other Commission 
divisions, industry self-regulatory associations; state, federal, and 
international authorities; and members of the public.
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    \14\ The Act is codified at 7 U.S.C. 1 et seq. (2000).
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    The OCR will be of immediate help to this investigatory work, 
especially if it relies on aggregating related trading accounts. DOE 
investigations in the areas of intra-day manipulation and trade 
practice abuses rely on exchange trade registers. At present, however, 
the absence of ownership and control information in trade register data 
presents an obstacle when DOE is investigating potential price 
manipulations or trade practice abuses, such as front-running. Without 
this information, DOE staff must first identify the universe of 
accounts traded in a relevant period, then request and await 
information from outside the Commission to identify the entity 
associated with the account number, and finally aggregate all 
identified entities that relate to a common owner. Only then can staff 
assess a particular owner's trading activity. This time-consuming 
process must be re-created every time DOE initiates an intra-day 
trading manipulation investigation. The Commission believes the 
information contained in the OCR would significantly reduce the time 
and resources expended in determining the identities and relationships 
between account holders, and thus facilitate DOE investigations and 
prosecutions across markets and exchanges.

[[Page 41779]]

3. Benefits to the Office of the Chief Economist
    OCE conducts research on major policy issues facing the Commission 
and assesses the economic impact of regulatory changes on the futures 
markets. It also participates in the development of Commission 
rulemakings, provides expert advice to other Commission offices and 
divisions, and conducts special studies and evaluations as required. An 
important objective of OCE is to help the Commission achieve deeper and 
more sophisticated knowledge of the futures markets from the data 
available to it. The OCR will advance this objective in significant 
ways.
    OCE is particularly interested in the OCR as a tool for enhancing 
the transparency of regulated markets through the disclosure of 
information on related accounts. It has a number of initiatives under 
way designed to enhance the Commission's surveillance capabilities, 
assist in enforcement, and improve data integrity. Related account 
information derived from the OCR will help OCE to better link traders' 
intra-day transactions with their end-of-day positions. It will also 
help OCE to calculate how different categories of traders contribute to 
market wide open-interest. Building on these results, OCE will achieve 
more sophisticated benefits for the Commission, including new avenues 
of surveillance and enforcement tools. For example, armed with OCR/
trade register-derived data, OCE will eventually be able to accurately 
identify and categorize market participants based on their actual 
trading behavior on a contract-by-contract basis, rather than on how 
they self-report to the Commission (e.g., registration type or 
marketing/merchandising activity on Commission Form 40).
    In addition to these specific projects, ownership and control 
information available via the OCR will allow OCE to perform more 
complete and accurate studies and provide more targeted guidance to 
other Commission staff in pursuing trade practice violations and 
attempted manipulations.

III. Comments Received in Response to the Advanced Notice

    The Commission received 12 comment letters from 16 commenters in 
response to the ANPR. Comment letters were submitted by: the Air 
Transport Association of America, Inc. (``ATA''); CME Group Inc. (``CME 
Group''); the Futures Industry Association (``FIA''); Foley & Lardner 
LLP (``F&L''); ICE Futures U.S., Inc. (``ICE Futures''); the Kansas 
City Board of Trade (``KCBT''); MF Global Inc. (``MF Global''); the 
Minneapolis Grain Exchange (``MGEX''); Newedge USA, LLC (``Newedge''); 
Paul, Hastings, Janofsky & Walker LLP (``PH''); the Petroleum Marketers 
Association of America and the New England Fuel Institute, writing 
jointly (``PMMA/NEFI''); and one private commenter (Mr. Zhang).\15\ 
Commission staff reviewed all comments carefully.
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    \15\ CME Group submitted a single comment letter on behalf of 
four DCMs: the Chicago Mercantile Exchange, Inc.; the Board of Trade 
of the City of Chicago, Inc.; the New York Mercantile Exchange, 
Inc.; and the Commodity Exchange, Inc. Its comments are noted here 
as those of a ``DCM group.''
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    Many commenters recognized potential regulatory benefits stemming 
from enhanced ownership and control information, including benefits for 
the public, the Commission, or industry self-regulatory 
organizations.\16\ Two commenters representing commodity trade 
associations strongly endorsed the OCR, noting their approval of 
``efforts to acquire all information from DCMs, ECMs, and DTEFs to 
improve market transparency and integrity.'' \17\ The OCR also received 
qualified support from some DCMs. One DCM, for example, indicated that 
the OCR will promote ``further integration of our existing market 
surveillance and trade practice surveillance data and bridge gaps that 
may exist between individual transaction data contained in the Exchange 
trade register and position data contained in large trader reports 
filed with the Exchange.'' \18\ Another stated the OCR will 
``exponentially increase market transparency'' and ``Commission and 
exchange compliance staffs will benefit greatly from the wealth of 
information at their disposal.'' \19\
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    \16\ ATA, CME Group, ICE Futures, KCBT, MGEX, PMMA/NEFI, and 
Zhang.
    \17\ PMAA/NEFI Joint Comment Letter at 1. In the ANPR, the 
Commission stated that it anticipates most OCR reporting entities 
will be DCMs, but they could be any registered entity that provides 
trade data to the Commission on a regular basis.
    \18\ ICE Futures Comment Letter at 1.
    \19\ KCBT Comment Letter at 1.
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    While commenters often acknowledged the regulatory value of 
gathering ownership and control information, many also expressed 
specific concerns with one or more elements of the OCR as described in 
the ANPR. One significant area of concern focused on the OCR's 
potential costs. Comments in this regard ranged from proposals to 
curtail the OCR to outright opposition to any OCR implementation. 
Commenters were also broadly concerned with the potential difficulty of 
acquiring certain OCR data points, and with whether every OCR data 
point contemplated in the ANPR is necessary to achieve the Commission's 
regulatory objectives. Finally, commenters raised concerns with respect 
to the privacy of ownership and control information and equal 
implementation of OCR requirements across exchanges. These concerns, 
and the Commission's responses to them, are summarized below.

A. The OCR's Costs, Benefits, and Alternatives

    Several commenters raised concerns with respect to the OCR's 
potential costs. At one extreme, an FCM commenter expressed outright 
opposition to the OCR, claiming that it would ``result in an inordinate 
amount of work and expense for many, if not most FCMs'' and may ``cause 
some FCMs to go out of business.'' \20\ The FCM also asserted that the 
CFTC apparently had not ``considered the burden that would be imposed 
on FCMs other than to a relatively nominal extent.'' \21\ Similarly, an 
industry association representing numerous large FCMs stated that the 
OCR ``would impose a significant burden on FCMs'' and ``the potential 
costs will far outweigh the expected benefits to the Commission.'' \22\
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    \20\ Newedge Comment Letter at 1 and 5.
    \21\ Newedge Comment Letter at 8. In a related footnote, Newedge 
described how the SEC ``conducts a cost-benefit analysis,'' analyzes 
new rules under the Paperwork Reduction Act,'' and ``prepares a 
final regulatory flexibility analysis in its rulemakings.'' The 
Commission notes that these elements were not included in the ANPR, 
which was not a proposed or final rule, but they are included in 
this Notice.
    \22\ FIA Comment Letter at 2.
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    Many commenters concerned with the OCR's potential costs 
recommended that the Commission pursue a more limited OCR that focuses 
only on a limited number of trading accounts. Specifically, they 
suggested that the OCR should be a record of ownership and control for 
trading accounts tied to ``special accounts'' in the Commission's large 
trader reporting system. One DCM group, for example, asked the 
Commission to consider whether ownership and control information was 
necessary for every account, ``as experience suggests there is little 
incremental regulatory value below certain thresholds.'' \23\ It 
recommended that the Commission instead ``automate the data collection 
process for Form 102s.'' \24\ In support of its

[[Page 41780]]

recommendation, the DCM group argued that the OCR is a ``largely 
duplicative report'' when compared to the Form 102 and that 
``modernizing'' and ``enhancing the accuracy'' of the Form 102 would be 
more cost effective than developing a new report.\25\ Similarly, an FCM 
commenter ``question[ed] the benefits to be gained by obtaining Form 
102-type information for small trades and/or inactive accounts,'' \26\ 
and an industry association contested ``the necessity of collecting OCR 
data with respect to accounts that have not been designated `special 
accounts.' '' \27\
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    \23\ CME Group Comment Letter at 5.
    \24\ CME Group Comment Letter at 4. The Form 102, titled 
``Identification of Special Accounts,'' is part of the Commission's 
large-trader reporting system. The Form 102 must be filed by FCMs, 
clearing members and foreign brokers who carry special accounts. 
Special accounts are accounts that reach large-trader reportable 
position levels in a particular product, these levels are 
established by the Commission.
    \25\ CME Group Comment Letter at 4.
    \26\ Newedge Comment Letter at 7. The Form 102, titled 
``Identification of Special Accounts,'' is part of the Commission's 
large-trader reporting system.
    \27\ FIA Comment Letter at 4.
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    The Commission appreciates commenters' concerns with respect to the 
OCR's potential costs. However, it also believes that commenters have 
not fully understood the Commission's intended uses for ownership and 
control information. For example, commenters' emphasis on an enhanced 
Form 102 as an alternative to the OCR suggest that they view the OCR 
primarily as an addendum to the Commission's market surveillance 
program, which aims to detect and deter price manipulation through 
reporting and surveillance of open positions. In this regard, the 
Commission notes that while its objectives do include improved position 
surveillance, they also include improved trade surveillance--regardless 
of position size--and other regulatory goals outlined previously. 
Indeed, the proposed OCR forms a new category of surveillance data that 
will benefit any regulatory effort focused on trades and trading 
behavior by account owners and controllers within and across reporting 
entities. The Commission believes that such information is vital for 
effective oversight of the U.S. futures markets.
    At the same time, the Commission is sensitive to the cost concerns 
raised in response to the ANPR. It invites interested parties to 
include detailed cost estimates in any future comment letters submitted 
with respect to the proposed OCR. Such estimates should be as specific 
as possible, should itemize different categories of costs (e.g., 
hardware and software, personnel, one-time ``start-up'' costs, and on-
going operational costs), and should reflect the costs to the commenter 
itself rather than an industry average. The Commission is also open to 
comments suggesting that the OCR should be limited to accounts meeting 
certain thresholds as a way of containing its costs. However, such 
comments should address an account's trading volume or frequency within 
a given time period, and not just its relationship to a reportable 
position under the large trader reporting system. Any comments 
suggesting that the Commission gather ownership and control information 
for only a subset of accounts based on their trading volume or 
frequency should also document the cost savings to the commenter from 
reporting only that subset. In addition, any such comments should also 
address how the commenter's proposed threshold would meet the 
Commission's regulatory needs as explained in this Notice.
    A second significant theme in the comment letters pertained to the 
flow of ownership and control information from its root sources, 
through reporting entities, and on to the Commission. Citing cost and 
efficiency, two DCMs recommended that FCMs and clearing members submit 
their ownership and control information directly to the Commission.\28\ 
They suggested that FCM reporting entities would benefit if their 
reporting systems could be built to a single Commission standard rather 
than to multiple exchange standards.\29\ Another DCM recommended that 
ownership and control information be sent directly to the Commission to 
resolve any jurisdictional issues that might arise when exchanges 
require data from non-members.\30\ In contrast to these DCM 
perspectives, an industry association representing FCMs agreed that 
``DCMs would be the appropriate funnel through which [OCR] information 
is transmitted to the Commission.'' \31\ However, to avoid undue burden 
arising from divergent OCR standards at different exchanges, it also 
proposed that the ``protocols prescribing the content, format and 
transmission of ownership and control information from FCMs to the 
several DCMs be uniform.'' \32\
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    \28\ KCBT Comment Letter at 1. MGEX Comment Letter at 1.
    \29\ KCBT Comment Letter at 2.
    \30\ ICE Futures Comment Letter at 4.
    \31\ FIA Comment Letter at 2.
    \32\ FIA Comment Letter at 2.
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    The Commission agrees that uniform protocols are an absolute 
necessity for the OCR. Accordingly, the proposed rule specifies that 
reporting entities must adopt a single standard, acceptable to the 
Commission, for submitting their OCRs to the Commission. Such standards 
will apply to the OCR's content, format, and the time and manner of its 
transmission. The Commission anticipates that this requirement will 
lead reporting entities and their root data sources to coordinate their 
efforts and develop an industry-wide standard for the flow of ownership 
and control information from root data sources to reporting 
entities.\33\ In addition, the Commission proposes to grant the 
industry adequate time to design and implement the OCR once a final 
rule is adopted, as explained below. With respect to jurisdictional 
issues, the Commission is aware that some market participants may not 
be members of their corresponding reporting entity. However, in these 
cases, or where ``membership'' is not a relevant concept based on an 
reporting entity's business structure, market participants must still 
access the exchange directly via its facilities or via those of an 
intermediary providing a technology interface, a clearing guarantee, or 
some other service. Successful implementation of the OCR will require 
reporting entities to offer their services only on the condition that 
ownership and control information be provided upon request by the 
relevant party in possession of such information. Finally, the 
Commission believes that reporting entities are the appropriate vehicle 
for reporting ownership and control information to the Commission. The 
trading account numbers which they provide in their OCRs must correlate 
perfectly to those reported on their related trade registers. Thus, 
reporting entities are in the best position to ensure that their trade 
registers and their OCRs match as required.
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    \33\ ``Root data sources'' are those entities from which 
reporting entities may need to gather certain ownership and control 
information in order to provide the Commission with a complete OCR 
for every trading account active in its markets.
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B. Ownership and Control Information May Be Difficult To Obtain or 
Unnecessary

    Many commenters raised concerns with respect to the organizational 
and technological challenges that reporting entities and root data 
sources may face in gathering and standardizing ownership and control 
information. The FCM community, in particular, focused on the 
difficulty of aggregating data from different internal systems into a 
single OCR file. An industry association, for example, stated that 
``[t]he creation, use, form, storage and retention of data are not 
uniform across FCMs'' and some information might even be ``on paper 
stored at offsite retention centers'' or otherwise unavailable.\34\ An 
FCM explained how ``many FCMs maintain

[[Page 41781]]

trade reporting information and trader/system IDs in different 
locations'' and how it would be a ``difficult and time-consuming task'' 
to reconcile this data.\35\
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    \34\ FIA Comment Letter at 2.
    \35\ Newedge Comment Letter at 4.
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    A number of letters identified specific account and trade types 
that may present special challenges in an OCR.\36\ One DCM group noted 
that ``[g]ive-up transactions, bunched orders and omnibus accounts are 
widespread in the industry, and each creates challenges in the context 
of the OCR as currently proposed.'' \37\ An industry association 
provided additional information, explaining that for give-up trades 
``[t]he account number used by the executing firm does not necessarily 
tie back to the account number used by the clearing firm for a 
customer's account.'' \38\ Another DCM noted that ``[e]xtra efforts 
will be needed to obtain and keep current detail[ed] information that 
involves omnibus accounts, index accounts with multiple investors, or 
any accounts with multiple owners, participants or controllers.'' \39\ 
A third DCM explained its belief that omnibus and give-up accounts will 
be difficult to obtain information from ``because the underlying 
accounts are not carried on the clearing member's books.'' \40\ This 
concern was echoed by another FCM as an important component of its 
comment letter.
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    \36\ CME Group, FIA, ICE Futures, KCBT, MF Global, and MGEX.
    \37\ CME Group Comment Letter at 4.
    \38\ FIA Comment Letter at 3.
    \39\ MGEX Comment Letter at 2.
    \40\ KCBT Comment Letter at 3.
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    Some commenters questioned whether every OCR data point 
contemplated in the ANPR is necessary to achieve the Commission's 
regulatory objectives. One DCM, for example, stated that ``it does not 
believe that all the information itemized in the Advanced Notice is 
necessary'' and that ``some of the information would be redundant.'' 
\41\ Similarly, a DCM group focused specifically on the date of 
ownership assignment and the commodity trading advisor number, stating 
that these data points ``may add complexity to the reporting process 
without commensurate value.'' \42\
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    \41\ ICE Futures Comment Letter at 2.
    \42\ CME Group Comment Letter at 4.
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    As a consequence of these perceived challenges, the Commission 
received a significant number of comment letters suggesting that it 
form an industry-wide working group to discuss the OCR and its 
implementation. DCM and FCM commenters both concurred in the 
recommendation. One commenter, for example, called for an ``inclusive, 
industry-wide committee calling on the expertise of all affected 
stakeholders * * * to address significant operational and other issues 
regarding the appropriate design of the OCR.'' \43\
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    \43\ FIA Comment Letter at 1.
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    The Commission is aware of the numerous challenges posed by the 
OCR. However, it believes that those challenges can be overcome via a 
coordinated industry effort and a reasonable implementation schedule. 
Upon the adoption of any final rule in this area, the Commission will 
grant reporting entities and root data sources considerable time to 
coordinate, develop, and implement the OCR. Specifically, the 
Commission would propose to require OCR test files from all reporting 
entities within 12 months of a final rule, and final OCR implementation 
within 18 months of a final rule. Interested parties are invited to 
comment on this proposed schedule. Any comments requesting additional 
time to implement test or final OCRs should include an alternate 
implementation schedule with specific dates and benchmarks.
    The Commission also emphasizes that its proposal has a number of 
features intended to eliminate unnecessary data points from the OCR and 
to define ownership and control in less than the broadest possible 
terms. First, to facilitate implementation, the Commission has 
determined to eliminate from the OCR several data points that were 
included in the ANPR. For example, the proposed OCR does not include 
the date on which the trading account was assigned to its current 
owner(s). In addition, as discussed below, the proposed OCR would not 
collect information with respect to social security numbers or taxpayer 
identification numbers.
    Second, the Commission notes that at least one technical obstacle, 
pertaining to give-ups, can potentially be addressed via improvements 
to the daily exchange trade registers on which OCR account numbers will 
be based. Via a separate initiative, the Commission has already 
requested that exchanges create a ``give-up group ID'' that links two 
related events--the execution of a trade and its subsequent give-up, 
both of which are reported on trade registers. In cases where an 
execution-only firm does not possess ownership and control information 
for the given-up trade, the reporting entity may collect it from the 
clearing firm, and the Commission will be able to form a complete 
record of the trade and its subsequent allocation through the give-up 
group ID.\44\ With respect to omnibus accounts, however, the Commission 
believes that identifying their ultimate beneficial owners and 
controllers remains necessary despite the acquisition of information 
which will be required with respect to accounts trading on an 
undisclosed basis.
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    \44\ In this scenario, the executing firm should provide 
ownership and control information for the execution account, and the 
clearing firm should provide the account to which the trade is 
given-up. The Commission will link both through the give-up group 
ID.
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    Third, the proposed OCR reduces the overall reporting burden by 
narrowing the definition of ``ownership'' with respect to collective 
investment vehicles (``CIV'').\45\ Under the proposed OCR, CIV 
ownership information will be required only with respect to persons 
whose ownership share is 10 percent or more of the CIV's net asset 
value, as defined in Commission Regulation 4.10. Fourth, the proposed 
OCR defines ``controller'' as an individual or individuals with the 
legal authority to exercise discretion over trading decisions by a 
trading account or with the authority to determine the trading strategy 
of an automated trading system. The authority to exercise discretion is 
sufficient to qualify as a controller, regardless of whether such 
authority is actually used. Individuals acting without discretion will 
not be considered account controllers.
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    \45\ While ``collective investment vehicle'' is not defined in 
regulations under the CEA, it is ``commonly used to describe any 
entity through which persons combine funds (i.e., cash) or other 
assets, which are invested and managed by the entity.'' 67 FR 48328, 
48331 (July 23, 2002).
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    Interested parties are invited to comment on the Commission's 
proposed definitions, including its proposed definitions of ownership 
and control, and to suggest specific alternatives if they will achieve 
the Commission's objectives in a more efficient manner. The Commission 
also invites comments from interested parties who believe that a data 
point in the proposed OCR is impossible to collect for technical 
reasons. Such comments should fully explain the technical obstacle, 
including the account, trade, or ownership type to which the obstacle 
applies. Comments should also identify the entity holding the data in 
question, or an explanation that the data is not maintained by any 
entity subject to the Commission's authority or that of a Commission 
registrant (including any requirement that a user of an exchange's 
facilities consent to providing ownership and control information prior 
to utilizing such facilities). Any request to deviate from the 
definitions or data points in the proposed OCR should include

[[Page 41782]]

technical diagrams; data flow-charts; FCM, introducing broker (``IB'') 
and foreign broker account opening and record retention procedures with 
respect to that data point; and other detailed information as 
appropriate to establish the difficulty or impossibility of 
implementing the OCR as proposed. In short, while the Commission is 
prepared to amend the proposed OCR where necessary, it will do so only 
on the basis of detailed and well-documented comments.
    Finally, the Commission notes that it does not intend to convene an 
industry working-group to develop the OCR. While industry coordination 
will be crucial, the Commission's role is to clearly articulate its 
requirements and expectations. Industry participants are best situated 
to determine how those requirements can be met. Should any element of 
the proposed OCR remain unclear, the Commission strongly encourages 
industry participants to present their questions via the public comment 
process for this proposed rule.

C. The OCR Should Be Implemented Equally Across Exchanges and Should 
Respect Privacy Considerations

    Some commenters argued that DCMs should not be the only registered 
entities required to provide the OCR. One DCM group noted its concern 
that the OCR is limited to trading accounts active on U.S. futures 
exchanges, and does not ``encompass trading on exempt commercial 
markets (``ECMs'') and foreign boards of trade (``FBOTs'').'' The DCM 
group stated that such an exclusion ``would give ECMs and FBOTs an 
unfair competitive advantage over U.S. futures exchanges.'' \46\ 
Similarly, a commodity trade association urged the Commission to obtain 
OCR information from all trading platforms including the OTC 
market.\47\
---------------------------------------------------------------------------

    \46\ CME Group Comment Letter at 3.
    \47\ ATA Comment Letter at 1.
---------------------------------------------------------------------------

    The Commission agrees that OCR requirements should apply equally to 
all entities reporting trade data to the Commission on a regular basis 
for trade practice or market surveillance purposes. For purposes of 
this Notice, however, the proposed OCR specifically includes DCMs, 
DTEFs, and ECM SPDCs within the definition of reporting entities.\48\ 
In addition, the Commission emphasizes that its proposed rule requires 
ownership and control information equally regarding both U.S. and non-
U.S. entities and natural persons.
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    \48\ The Commission notes that OCRs will only be required with 
respect to trading account numbers reported on trade registers. 
Thus, an ECM SPDC reporting trades in only certain contracts (i.e., 
SPDC contracts) will be required to provide ownership and control 
information only for trading accounts active in those contracts.
---------------------------------------------------------------------------

    Should the Commission receive appropriate statutory authority with 
respect to OTC and swap transactions, it would consider collecting 
ownership and control information with respect to such 
transactions.\49\ The Commission invites public comment in this area, 
including comment with respect to the entities (e.g., trade 
repositories, designated contract markets, or swap execution 
facilities) from which the Commission should collect OCR data and the 
product and transaction types for which the Commission should collect 
data. The Commission invites public comment on any additional types of 
information or data elements related to OTC and swap transactions that 
should be collected and reported to the Commission.
---------------------------------------------------------------------------

    \49\ Congress has begun to take steps to promote transparency in 
swap contracts. The financial services reform bills passed by the 
House of Representatives and the Senate each requires swaps to be 
cleared, subject to certain exemptions, and further requires, with 
respect to swaps that are subject to the clearing requirement, that 
such swaps be executed on a board of trade designated as a contract 
market under Section 5 of the Act or on a swap execution facility 
registered or exempt under Section 5h of the Act (where such a 
trading environment is available).
---------------------------------------------------------------------------

    Five commenters expressed concerns regarding OCR information 
security and confidentiality.\50\ One law firm commenter, for example, 
focused its comment letter, on ``ensuring that all identifying 
information, including highly sensitive Social Security number 
information, will be treated as confidential and not subject to public 
disclosure.'' \51\ It specifically asked that the Commission ``address 
confidentiality concerns as it moves forward with its rulemaking'' and 
``incorporate a requirement that the exchanges, in gathering this 
information, have a duty to treat it as non-public and confidential.'' 
\52\ An FCM commenter raised a similar concern when it asked ``can the 
CFTC ensure that exchanges will not use sensitive account ownership or 
controller information for their own purposes?'' \53\ One DCM stated 
that the exchange ``rarely found it necessary to obtain the Social 
Security Number (``SSN'') or Tax Identification Number (``TIN'') of a 
trader'' and that the risks involved in the ``collection, transmission 
and use of client SSN/TIN information by multiple entities outweigh the 
benefit that collection of such information would bestow.'' \54\
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    \50\ FIA, F&L, ICE Futures, Newedge, and PH.
    \51\ F&L Comment Letter at 1.
    \52\ F&L Comment Letter at 1 and 2.
    \53\ Newedge Comment Letter at 6.
    \54\ ICE Futures Comment Letter at 2.
---------------------------------------------------------------------------

    The Commission agrees with several of the privacy concerns raised 
above. Its internal use and handling of ownership and control 
information will be protected using controls mandated by the Federal 
Information Security Management Act of 2002 (``FISMA'').\55\ 
Specifically, OCR data will be treated as non-public personal 
information and will be subject to internal access controls. Submission 
of the OCR to the Commission will be through secure communications 
protocols. Any CFTC system or equipment used to store or transmit the 
OCR will be certified and accredited as a major system with medium risk 
and will have appropriate controls for access; awareness and training; 
audit and accountability; configuration management; contingency 
planning; identification and authentication; incident response; 
maintenance; media protection; physical environment; personnel; 
acquisition; communications; and integrity. Subject to a number of 
narrow exceptions, the Commission notes that Section 8(a) of the Act 
severely restricts disclosure of ``information that would separately 
disclose the business transactions or market positions of any person 
and trade secrets or names of customers.'' \56\ Furthermore, the 
Commission pursuant to Section 8a(6) of the Act, may in connection with 
investigations of improper trading or transactions, disclose to any 
registered entity, registered futures association or self-regulatory 
organization (``SRO''), factual data such as market positions, business 
transactions, and the names of the parties. However, the registered 
entity, registered futures association or SRO, may not disclose this 
information

[[Page 41783]]

received from the Commission except in any SRO action or 
proceeding.\57\
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    \55\ See 44 U.S.C. 3541 et seq. FISMA was enacted in 2002 as 
Title III of the E-Government Act of 2002 (Pub. L. 107-347, 116 
Stat. 2899) and recognizes the importance of information security to 
the economic and national security interests of the United States. 
It requires the Commission and other federal agencies to develop, 
document and implement agency-wide programs to provide information 
security for the information and information systems that support 
the operations and assets of the agency, including those provided or 
managed by another agency, contractor, or other source.
    \56\ Section 8(e) of the Act provides that the Commission may 
``upon request'' furnish information in its possession to any 
committee of Congress, another U.S. government department or agency, 
individual state or foreign futures authority ``acting within the 
scope of its jurisdiction.'' Similarly, disclosure of information is 
also permitted under Section 8(b) of the Act in connection with 
congressional, administrative or judicial proceedings, in any 
receivership proceeding involving a receiver appointed in a judicial 
proceeding brought under the Act, or in any bankruptcy proceeding in 
which the Commission has intervened, or in which the Commission has 
the right to appear and be heard under Title 11 of the U.S. Code.
    \57\ In connection with Section 8a(6), the Commission has 
designated and authorized certain Commission employees to disclose 
confidential information to certain, designated Exchange staff. See 
17 CFR 140.72. The disclosure of confidential information in this 
Regulation specifically requires a prior determination by the 
Commission or its designees that the disclosure is necessary because 
``the transaction or market operation disrupts or tends to disrupt 
any market or is otherwise harmful or against the best interests of 
producers, consumers, or investors or that disclosure is necessary 
or appropriate to effectuate the purposes of the [CEA].'' 17 CFR 
140.72(a).
---------------------------------------------------------------------------

    The Commission has also determined not to collect the last four 
digit of account owners' and controllers' SSNs or TINs, as originally 
contemplated in the ANPR. While its objectives for the OCR require that 
the Commission identify all trading account owners and controllers 
uniquely within and across reporting entities, the Commission is also 
sensitive to the privacy and security concerns summarized above. 
Accordingly, the Commission proposes to achieve the unique 
identification that SSNs and TINs would have provided via a combination 
of other data points. The proposed OCR would require reporting entities 
to provide the name and address of a trading account's owner(s) and 
controller(s). It would also require the date of birth for each account 
owner and controller, as well as their NFA ID number, if any. These 
data points are additions to the OCR as contemplated in the ANPR, and 
seek to mitigate the loss of SSNs and TINs as unique identifiers for 
account owners and controllers.
    In the alternative, or in addition to the aforementioned data 
points, the Commission invites public comment with respect to how the 
futures industry could develop and maintain a system to assign unique 
account identification numbers (``UAIN'') to all account owners and 
account controllers. The Commission would consider requiring that the 
UAIN be utilized in the OCR and potentially other data reports 
submitted to the Commission for regulatory purposes. The Commission 
also invites comment on how this UAIN could be linked to all orders 
submitted to an exchange's electronic trading system or executed via 
open outcry, and included in the trade registers submitted daily to the 
Commission by exchanges. The Commission seeks comment on how the UAIN 
could be automatically linked to a trade when a user signs into a 
trading system. Should the Commission receive appropriate statutory 
authority with respect to OTC and swap transactions, the Commission 
seeks comment on how the UAIN could be linked to a swap transaction.
    Finally, the proposed rule implementing the OCR requires each 
reporting entity to segregate information provided to it by root data 
sources if such data is provided in furtherance of the Commission's OCR 
requirements and not otherwise required to be provided by the reporting 
entity (``protected data''). More specifically, reporting entities must 
ensure that their protected data is used only for regulatory or 
enforcement purposes such as trade practice surveillance, market 
surveillance, audit, investigative, or rule enforcement. The use of 
protected data for any commercial reasons, including business 
development, is strictly prohibited. In addition, protected data must 
be under the exclusive control of the reporting entity's regulatory 
compliance department. Reporting entities should establish appropriate 
``firewall'' procedures and access controls to ensure the 
confidentiality, privacy, and safekeeping of protected data within 
their regulatory compliance departments. Commission staff will review 
the adequacy and implementation of such controls during its periodic 
reviews of trading facilities' self-regulatory programs.

IV. Ownership and Control Report Outline

    The OCR will serve as an ownership, control, and relationship 
directory for every trading account number reported to the Commission 
through reporting entities' trade registers. The data points proposed 
for the OCR have been specifically selected to achieve four Commission 
objectives. These include: (1) Identifying all accounts that are under 
common ownership or control at a single reporting entity; (2) 
identifying all accounts that are under common ownership or control at 
multiple reporting entities; (3) identifying all trading accounts whose 
owners or controllers are also included in the Commission's large 
trader reporting program (including Forms 40 and 102); and (4) 
identifying the entities to which the Commission should have recourse 
i