For purposes of this part, the term affiliated person of a futures commission merchant or of an introducing broker means any general partner, officer, director, owner of more than ten percent of the equity interest, associated person or employee of the futures commission merchant or of the introducing broker, and any relative or spouse of any of the foregoing persons, or any relative of such spouse, who shares the same home as any of the foregoing persons.

Each contract market shall adopt and submit to the Commission for approval pursuant to section 5a(a)(12)(A) of the Act and § 1.41 of this chapter, a set of rules which shall, at a minimum, with respect to each member of the contract market acting as a floor broker:

(a) Prohibit such member from purchasing any commodity for future delivery, purchasing any call option, or selling any put option, for his own account or for any account in which he has an interest, while holding an order of another person for the (1) purchase of any future, (2) purchase of any call option, or (3) sale of any put option, in the same commodity which is executable at the market price or at the price at which such purchase or sale can be made for the member's own account or any account in which he has an interest.

(b) Prohibit such member from selling any commodity for future delivery, selling any call option, or purchasing any put option, for his own account or for any account in which he has an interest, while holding an order of another person for the (1) sale of any future, (2) sale of any call option, or (3) purchase of any put option, in the same commodity which is executable at the market price or at the price at which such sale or purchase can be made for the member's own account or any account in which he has an interest.

(c) Prohibit such member from executing any transaction for any account of another person for which buying and/or selling orders can be placed or originated, or for which transactions can be executed, by such member without the prior specific consent of the account owner, regardless of whether the general authorization for such orders or transactions is pursuant to a written agreement, except that orders for such an account may be placed with another member for execution.

(d) Prohibit such member from disclosing at any time that he is holding an order of another person or from divulging any order revealed to him by reason of his relationship to such other person, except pursuant to paragraph (c) of this section or at the request of an authorized representative of the Commission or the contract market.

(e) Prohibit such member from taking, directly or indirectly, the other side of any order of another person revealed to him by reason of his relationship to such other person, except with such other person's prior consent and in conformity with contract market rules approved by the Commission.

(f) Prohibit such member from making any purchase or sale which has been directly or indirectly prearranged.

(g) Prohibit such member from allocating trades among accounts except in accordance with rules of the contract market which have been approved by the Commission.

(h) Prohibit such member from withholding or withdrawing from the market any order or part of an order of another person for the convenience of another member.

(i) Require that every execution of a transaction on the floor by such member be confirmed promptly with the opposite floor broker or floor trader; such confirmation shall identify price or premium, quantity, future or commodity option and respective clearing members. In the event a contract market cannot require prompt identification of respective clearing members without seriously disrupting the functions of its marketplace, the contract market may petition the Commission for exemption from this requirement. Such petition shall include:

(1) An explanation of why the contract market cannot require the prompt identification of respective clearing members without seriously disrupting the functions of its marketplace, and

(2) A proposed contract market rule which will insure that the opposite sides of every trade executed on the contract market can be effectively matched and will be accepted by a clearing member for clearance or will be otherwise sufficiently guaranteed.

(a) Each futures commission merchant shall, at a minimum, establish and enforce internal rules, procedures and controls to:

(1) Insure, to the extent possible, that each order received from a customer or from an option customer which is executable at or near the market price is transmitted to the floor of the appropriate contract market before any order in any future or in any commodity option in the same commodity for any proprietary account, any other account in whch an affiliated person has an interest, or any account for which an affiliated person may originate orders without the prior specific consent of the account owner, if the affiliated person has gained knowledge of the customer's or option customer's order prior to the transmission to the floor of the appropriate contract market of the order for a proprietary account, an account in which the affiliated person has an interest, or an account in which the affiliated person may originate orders without the prior specific consent of the account owner; and

(2) Prevent affiliated persons from placing orders, directly or indirectly, with another futures commission merchant in a manner designed to circumvent the provisions of paragraph (a)(1) of this section.

(b) No futures commission merchant or any of its affiliated persons shall:

(1) Disclose that an order of another person is being held by the futures commission merchant or any of its affiliated persons, unless such disclosure is necessary to the effective execution of such order or is made at the request of an authorized representative of the Commission, the contract market on which such order is to be executed, or a futures association registered with the Commission pursuant to section 17 of the Act; or

(2) Knowingly take, directly or indirectly, the other side of any order of another person revealed to the futures commission merchant or any of its affiliated persons by reason of their relationship to such other person, except with such other person's prior consent and in conformity with contract market rules approved by the Commission.

(c) No futures commission merchant shall knowingly handle the account of any affiliated person of another futures commission merchant or of an introducing broker unless the futures commission merchant:

(1) Receives written authorization from a person designated by such other futures commission merchant or introducing broker with responsibility for the surveillance over such account pursuant to paragraph (a)(2) of this section or § 155.4 (a)(2), respectively;

(2) Prepares immediately upon receipt of an order for such account a written record of such order, including the account identification and order number, and records thereon, by time-stamp or other timing device, the date and time, to the nearest minute, the order is received; and

(3) Transmits on a regular basis to such other futures commission merchant or introducing broker copies of all statements for such account and of all written records prepared upon the receipt of orders for such account pursuant to paragraph (c)(2) of this section.

(d) No affiliated person of a futures commission merchant shall have an account, directly or indirectly, with another futures commission merchant unless:

(1) Such affiliated person receives written authorization to maintain such an account from a person designated by the futures commission merchant with which such person is affiliated with responsibility for the surveillance over such account pursuant to paragraph (a)(2) of this section; and

(2) Copies of all statements for such account and of all written records prepared by such other futures commission merchant upon receipt of orders for such account pursuant to paragraph (c)(2) of this section are transmitted on a regular basis to the future commission merchant with which such person is affiliated.

(a) Each introducing broker shall, at a minimum, establish and enforce internal rules, procedures and controls to:

(1) Insure, to the extent possible, that each order received from a customer or from an option customer which is executable at or near the market price is transmitted to the futures commission merchant carrying the account of the customer or option customer before any order in any future or in any commodity option in the same commodity for any proprietary account, any other account in which an affiliated person has an interest, or any account for which an affiliated person may originate orders without the prior specific consent of the account owner, if the affiliated person has gained knowledge of the customer's or option customer's order prior to the transmission to the floor of the appropriate contract market of the order for a proprietary account, an account in which the affiliated person has an interest, or an account in which the affiliated person may originate orders without the prior specific consent of the account owner; and

(2) Prevent affiliated persons from placing orders, directly or indirectly, with any futures commission merchant in a manner designed to circumvent the provisions of paragraph (a)(1) of this section.

(b) No introducing broker or any of its affiliated persons shall:

(1) Disclose that an order of another person is being held by the introducing broker or any of its affiliated persons, unless such disclosure is necessary to the effective execution of such order or is made at the request of an authorized representative of the Commission, the contract market on which such order is to be executed, or a futures association registered with the Commission pursuant to section 17 of the Act; or

(2) Knowingly take, directly or indirectly, the other side of any order of another person revealed to the introducing broker or any of its affiliated persons by reason of their relationship to such other person, except with such other person's prior consent and in conformity with contract market rules approved by the Commission.

(c) No affiliated person of an introducing broker shall have an account, directly or indirectly, with any futures commission merchant unless:

(1) Such affiliated person receives written authorization to maintain such an account from a person designated by the introducing broker with which such person is affiliated with responsibility for the surveillance over such account pursuant to paragraph (a)(2) of this section; and

(2) Copies of all statements for such account and of all written records prepared by such futures commission merchant upon receipt of orders for such account pursuant to § 155.3(c)(2) are transmitted on a regular basis to the introducing broker with which such person is affiliated.

(a) Definitions. For purposes of this section:

(1) Trading session means the hours during which a contract market is scheduled to trade continuously during a trading day, as set forth in contract market rules, including any related post-settlement trading session. A contract market may have more than one trading session during a trading day.

(2) Customer means an account owner for which a trade is designated with the customer type indicator prescribed under Commission regulation 1.35(e)(4).

(3) Contract market means any contract separately designated by the Commission, provided, that two or more contracts trading concurrently pursuant to a single designation order on other than a transitory basis and for which the contract terms differ significantly other than as to delivery or expiration months shall each be considered a contract market for purposes of this section, and provided further, that screen-based trading in a contract designated by the Commission to the extent conducted through a competitive auction process pursuant to an algorithm that applies non-discretionary rules of priority as permitted under contract market rules made effective under the Act shall be considered a separate contract market for purposes of this section.

(4) Dual trading means the execution of customer orders by a floor broker during the same trading session in which the floor broker executes directly or initiates and passes to another member for execution a transaction in the same contract market for:

(i) The floor broker's own account;

(ii) Any account in which the floor broker's ownership interest or share of trading profits is ten percent or more;

(iii) An account for which the floor broker has trading discretion; or

(iv) Any other account controlled by a person with whom such floor broker is subject to trading restrictions under section 4j(d) to the extent section 4j(d) has been applied by Commission rule or order.

(5) Daily trading volume means the total number of sells (or buys) executed in any contract market during a trading day, excluding from the computation ex-pit transactions as permitted under contract market rules that have been made effective under the Act.

(6) Average daily trading volume means an arithmetic average of daily trading volume in a contract market over a specified time period on any day when any expiration or delivery month was listed for trading.

(7) Volume year means a continuous 12-month period that includes the last calendar month-end date prior to the computation date.

(8) Computation date means the date on which a contract market computes its average daily trading volume for the most recent volume year.

(9) Affected contract market means a contract market in which the average daily trading volume equals or exceeds the threshold level of 8,000 contracts for each of four quarters during the most recent volume year.

(b) Dual trading prohibition. No floor broker shall dual trade in an affected contract market, except as provided in contract market rules that have been made effective pursuant to section 5a(a)(12) of the Act and Commission regulation 1.41, unless that contract market is exempted under paragraph (d) of this section. This prohibition shall not affect ex-pit transactions as described in paragraph (a)(5) of this section.

(c) Contract markets—(1) Contract market rules. Prior to the effective date of the dual trading prohibition under this section or under a Commission order denying an exemption petition filed pursuant to paragraph (d) of this section or revoking an exemption pursuant to paragraph (e) of this section, each affected contract market, unless exempted under paragraph (d) of this section, shall adopt rules that have been made effective pursuant to section 5a(a)(12) of the Act and Commission regulation 1.41 to prohibit dual trading in accordance with the provisions of this section. In the absence of such contract market rules, upon the effective date of the dual trading prohibition as implemented either under this section or by Commission order, Commission regulations 155.5 (a) and (b) shall be deemed to be rules of the contract market.

(2) Volume computation. Each contract market that may be subject to a dual trading prohibition shall determine whether it is an affected contract market by computing at least quarterly its average daily trading volume for each of four quarters during the most recent volume year. In addition, the contract market shall:

(i) At least five days before the effective date of the dual trading prohibition under this section or under a Commission order denying an exemption petition or revoking an exemption, and thereafter within at least two business days of each computation date, publish, in a manner sufficient to reach all members, a list of the affected contract markets and the effective date of the dual trading prohibition and, on the same date, provide that information in writing to the Director of the Division of Trading and Markets, or an employee of the Commission under the supervision of such Director, as may be designated by the Director; and

(ii) Maintain a record of its average daily trading volume computations required hereunder. Such record shall include the computation date, the beginning and ending dates for the volume year under consideration, the beginning and ending dates for each quarter in the volume year and the average daily trading volume for each quarter.

(3) Newly affected contract market. If a contract market that was not affected on the immediately preceding computation date becomes affected as of the current computation date, the effective date of a dual trading prohibition for that contract market shall be no more than 30 calendar days after the current computation date for that contract market.

(4) Permitted exceptions. Notwithstanding the applicability of a dual trading prohibition under this section, dual trading shall be permitted in affected contract markets in accordance with rules that have been submitted to the Commission pursuant to section 5a(a)(12) of the Act and Commission regulation 1.41 as follows:

(i) Correction of errors. To offset trading errors resulting from the execution of customer orders, provided, that the floor broker must liquidate the position in his personal error account resulting from that error by open and competitive means as soon as practicable, but not later than the close of business on the business day following the discovery of the error. In the event that the daily price fluctuation limit is reached and a floor broker is unable to offset the error trade, however, the floor broker must liquidate the position in his personal error account resulting from that error as soon as practicable thereafter.

(ii) Customer consent. To permit a customer to designate in writing not less than once annually a specifically identified floor broker to dual trade while executing orders for such customer's accounts. An account controller acting pursuant to a power of attorney may designate a dual trading broker on behalf of its customer, provided, that the customer explicitly grants in writing to the individual account controller the authority to select a dual trading broker.

(iii) Spread transactions. To permit a broker who unsuccessfully attempts to leg into a spread transaction for a customer to take the executed leg into his personal account and to offset such position, provided, that a record is prepared and maintained to demonstrate that the customer order was for a spread trade; to permit a broker to execute for his personal account a spread transaction recognized by a contract market if at least one leg of the spread is in a non-affected market; and to permit a broker to execute for his personal account an intra-market spread transaction if at least one leg of the spread is in a low-volume month as described in § 155.5(c)(4)(v).

(iv) Member customers. To permit transactions for members of the contract market not present on the floor, provided, that the contract market, within the single record required by Commission regulation 1.35(e), specifically identifies such transactions through account numbers, a separate customer type indicator, or otherwise for surveillance purposes.

(v) Low-volume months. To recognize any expiration or delivery month that, on the basis of historical data and an analysis thereof and other factors identified by the contract market, reasonably can be expected to have an average daily trading volume of less than 500 contracts during the period beginning with the current computation date and ending with the next computation date, provided, that the contract market keeps full and systematic records supporting these determinations and, as part of its trade surveillance program, establishes special procedures, including appropriate reports, to monitor dual trading activity in the relevant low-volume contract months.

(vi) Spot month. To recognize a period of trading in a maturing futures contract, during which period liquidity in the maturing futures contract reasonably can be expected on the basis of historical data and an analysis thereof and other factors identified by the contract market, to shift to the next contract month, provided, that the contract market can demonstrate that effective surveillance will be conducted for dual trading-related abuses during such period.

(vii) Market emergencies. To address emergency market conditions resulting in a temporary emergency action under Commission regulation 1.41(f).

(d) Exemption petitions—(1) Standards. A contract market may apply for an exemption from the dual trading prohibition of paragraph (b) of this section by filing a written petition, signed by the contract market's chief operating officer or, in his absence, an exchange official acting in the capacity of chief operating officer, that states facts sufficient to demonstrate that its trade monitoring system, consistent with the standards articulated in guidelines set forth in appendix A to this section, is capable of detecting and deterring, and is used on a regular basis to detect and deter, all types of violations attributable to dual trading, and is capable of generating an audit trail that satisfies the requirements of Commission regulation 1.35. The petition shall be directed to the Office of the Secretariat, Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581, with a copy to the Director of the Division of Trading and Markets.

(2) Content requirements. An exemption petition must identify each contract market that is, or is projected to be, affected. The petition must include a full description of each component of the contract market's trade monitoring system including the systems in place, rules, policies and procedures in effect, standards applied, trading violations targeted, and the results achieved. To the extent practicable, the petition shall include performance statistics covering the 12-month period ending with the month preceding the petition date. Where such statistics are not available, specific, representative performance examples should be provided. The petition also must set forth the contract market's program or plan and projected implementation timetable for conformity with the requirements of section 5a(b)(3) of the Act. An exemption petition must address, in the order listed below, the following components of a contract market's trade monitoring system:

(i) Physical observation of trading areas;

(ii) Audit trail and recordkeeping systems able to, and used to, capture essential data on the terms, participants, and sequence of transactions (including relevant data on unmatched trades and outtrades) and otherwise satisfy the requirements of Commission regulation 1.35 and section 5a(b)(3) of the Act, as implemented by Commission regulations and orders;

(iii) Systems capable of reviewing, and used to review, trading data effectively on a regular basis to detect, and other measures designed to prevent, rule violations attributable to dual trading committed in the execution of trades and customer orders on the floor or subject to the rules of the contract market, including:

(A) Trading ahead of customer orders directly or indirectly;

(B) Trading against customer orders directly or indirectly in violation of contract market rules;

(C) Disclosing, misallocating or withholding customer orders;

(D) Failing to resolve errors, unmatched trades or outtrades properly and promptly; and

(E) Crossing customer orders by matching or “offsetting” customer orders directly or indirectly in violation of contract market rules;

(iv) The use of information gathered through such systems on a consistent basis to bring appropriate disciplinary actions against violators;

(v) The commitment of resources necessary for such systems to be effective in detecting and deterring violations attributable to dual trading, including adequate staff to investigate and prosecute disciplinary actions; and

(vi) The assessment of meaningful penalties against violators and the referral of appropriate cases to the Commission.

(3) Alternative requirements. If a contract market believes that its trade monitoring system does not meet the standards set forth in paragraph (d)(1) of this section, the contract market's petition must include, in addition to the information required to be provided under paragraph (d)(2) of this section:

(i) A specific description of the corrective actions the contract market will take that it believes to be sufficient and appropriate to meet the standards in paragraph (d)(1) of this section, together with an explanation of the sufficiency and appropriateness of such actions, including specific implementation dates, any related changes in systems, operations, staffing, policies, rules, procedures, and budget allocations; and

(ii) Data and an economic analysis of that data to demonstrate any adverse impact of a dual trading prohibition on hedging and price basing at the contract market.

(4) Remittal. The Director of the Division of Trading and Markets (or an employee of the Commission under the supervision of such Director as may be designated by the Director) may remit to the contract market, with an appropriate explanation, and not accept pursuant to paragraph (d) of this section, any petition for exemption that does not comply with the content requirements of paragraphs (d)(2) and (3) of this section, as identified in the remittal letter. The affected contract market must resubmit its exemption petition with deficiencies corrected no more than 20 days after receipt of the remittal notice. If the exemption petition is not resubmitted within the prescribed 20-day period, the Commission, at its discretion, may permit the dual trading prohibition provided for in paragraph (b) of this section to become effective as to any such affected contract market. The Commission's review period shall be calculated from the date of resubmission.

(5) Deferred application of the prohibition. If a contract market submits a petition for exemption that satisfies the content requirements of paragraphs (d)(2) and (3) of this section prior to the effective date of the dual trading prohibition, the Commission will suspend application of the prohibition against the contract market unless and until the petition is denied, pursuant to the effective date set forth in the denial order.

(6) Publication. A notice of the submission of each exemption petition deemed complete under paragraphs (d)(2) and (3) of this section will be published promptly by the Commission or the Director of the Division of Trading and Markets (or by an employee of the Commission under the supervision of the Director, as may be designated by the Director) in the Federal Register. Upon publication of such notice, copies of each petition, with the exception of any information or materials determined by the Commission to be subject to confidential treatment, will be publicly available through the Office of the Secretariat in accordance with the provisions of part 145 of this chapter.

(7) Grant of exemption without conditions—(i) Findings and order. A contract market's exemption petition will be granted without conditions by Commission order if the Commission finds that, based on the information, views and arguments placed before it by the contract market in writing in its petition and any attachments or supplements thereto, and orally in any presentation pursuant to paragraph (d)(8)(iii) of this section, and other relevant information identified by the Commission, the contract market has demonstrated conformity with the standards contained in paragraph (d)(1) of this section. The Commission's order will state the Commission's findings.

(ii) Publication. A Commission order granting an exemption pursuant to this paragraph (d)(7) of this section will be published promptly in the Federal Register.

(iii) Effective date. A Commission order granting an exemption without conditions pursuant to this paragraph (d)(7) shall be effective upon issuance.

(8) Proposed conditional exemption or petition denial—(i) Notice. If the Commission intends to deny an exemption petition or to exempt a contract market subject to conditions, the Commission will notify the contract market in writing that it intends to deny or condition the petition and state:

(A) Specific deficiencies in the contract market's trade monitoring system;

(B) Any corrective actions to the trade monitoring system that the Commission believes the affected contract market must take to satisfy the standards of paragraph (d)(1) of this section, and a timetable for such corrective actions; and

(C) Any conditions or limitations that the Commission proposes to attach to an exemption under paragraph (d) of this section.

(ii) Publication. A notice issued to a contract market under this paragraph (d)(8) will be published promptly in the Federal Register.

(iii) Opportunity for written submission and oral presentation. Within five days of receipt of the notice from the Commission, the contract market may request in writing the opportunity to make an oral presentation to the Commission. The contract market will be notified promptly by the Commission of the date and the terms under which the contract market may make an oral presentation. The contract market must submit any written supplemental data, views, or arguments within 20 days of receipt of the Commission's notice, unless the Commission notifies the contract market otherwise.

(9) Grant of conditional exemption—(i) Findings and order. A contract market's exemption petition will be granted subject to conditions by Commission order if the Commission determines, based on the information, views and arguments placed before it by the contract market in writing in its petition and any attachments or supplements thereto, and orally in any presentation pursuant to paragraph (d)(8)(c)(iii) of this section and other relevant information identified by the Commission, that:

(A) The contract market's trade monitoring system does not satisfy the standards set forth in paragraph (d)(1) of this section, but other corrective actions are sufficient and appropriate to meet the standards in paragraph (d)(1) of this section;

(B) There is a substantial likelihood that a dual trading prohibition would harm the public interest in hedging or price basing at the contract market; and

(C) The conditions or limitations being attached to the grant of exemption by the Commission are appropriate in light of the purposes of this section.

(ii) Publication. A Commission order granting a conditional exemption pursuant to this paragraph (d)(9) will be published promptly in the Federal Register.

(iii) Effective date. A Commission order granting a conditional exemption pursuant to this paragraph (d)(9) shall become effective 20 days after issuance, unless the Commission determines that more immediate action is appropriate in the public interest and states an earlier effective date in the order.

(10) Denial of petition—(i) Findings and order. A contract market's exemption petition will be denied by Commission order if the Commission determines, based on the information, views and arguments placed before it in connection with the petition and other relevant information, that:

(A) The contract market has not demonstrated that its trade monitoring system satisfies the standards set forth in paragraph (d)(1) of this section, and there is not a substantial likelihood that a dual trading prohibition would harm the public interest in hedging or price basing at the contract market; or

(B) The contract market has demonstrated that there is a substantial likelihood that a dual trading prohibition may harm the public interest in hedging or price basing at the contract market, but has not demonstrated that other corrective actions are sufficient or appropriate to meet the standards in paragraph (d)(1) of this section.

(ii) Publication. A Commission order denying an exemption pursuant to this paragraph (d)(10) will be published promptly by the Commission in the Federal Register.

(iii) Effective date. A Commission order denying a contract market's petition for an exemption pursuant to this paragraph (d)(10) of this section shall become effective at least 20 days after issuance, unless the Commission determines that more immediate action is appropriate in the public interest.

(e) Exemption revocation. An exemption may be revoked if the Commission determines that the standards in paragraph (d)(1) of this section are not being met or if any condition of the exemption has not been met. The Commission shall notify the contract market in writing of its intent to issue an order to revoke the contract market's exemption. Such notice shall include the reasons for the proposed revocation and the procedures under which the contract market shall have the opportunity to be heard. After considering information relevant to the proposed revocation, the Commission shall determine whether to revoke the exemption. Any Commission revocation order shall state findings in support of the revocation and be effective at least 20 days after issuance unless the Commission determines that more immediate action is appropriate in the public interest. Such order shall state the date on which the dual trading prohibition shall take effect.

Except as otherwise provided in this part, the Commission may, in its discretion and upon such terms and conditions as it deems appropriate, exempt any contract market or other person from any of the provisions of this part.