[Federal Register Volume 81, Number 150 (Thursday, August 4, 2016)]
[Notices]
[Pages 51533-51536]
[FR Doc No: 2016-18471]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-78444; File No. SR-BOX-2016-37]

Self-Regulatory Organizations; BOX Options Exchange LLC; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change To
Detail How Complex Orders Will Execute Through the Facilitation Auction
Mechanism

July 29, 2016.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is hereby
given that on July 26, 2016, BOX Options Exchange LLC (``BOX'' or the
``Exchange'') filed with the Securities and Exchange Commission (the
``Commission'') the proposed rule change as described in

Items I and II below, which Items have been prepared by the Exchange.
The Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78a.
    \3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

    The Exchange proposes to detail how Complex Orders will execute
through the Facilitation Auction mechanism. The text of the proposed
rule change is available from the principal office of the Exchange, at
the Commission's Public Reference Room and also on the Exchange's
Internet Web site at http://boxexchange.com.

II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.

(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The purpose of the proposed rule change is to detail how the
Facilitation Auction mechanism will treat Complex Orders on the
Exchange.\4\ Pursuant to BOX Rule 7270, the Exchange has two block-
sized auction mechanisms, the Facilitation Auction Mechanism and the
Solicitation Auction Mechanism whereby Order Flow Providers (OFPs) can
provide price improvement opportunities for a transaction where the OFP
seeks to facilitate an order it represents as agent, and/or a
transaction where the OFP solicited interest to execute against an
order it represents as agent. Transactions executed through the
Facilitation or Solicitation auction mechanisms are comprised of the
order the OFP represents as agent (the ``Agency Order'') and the contra
order for the full size of the Agency Order (either the
``Facilitation'' or ``Solicitation'' Order).\5\ The contra order may
represent interest for the Participant's own account or interest the
Participant has solicited from one or more other parties, or a
combination of both.
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    \4\ Complex Orders are not currently traded through the
Facilitation Auction mechanism. Prior to implementation, BOX will
issue an informational circular to inform Participants of the
implementation date for Complex Orders to trade through the
Facilitation Auction.
    \5\ The Exchange notes that it does not trade stock option
orders.
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    This proposal only addresses how the Facilitation Auction mechanism
will treat Complex Orders on the Exchange. Similar to the ISE's Block-
Trade rules,\6\ Complex Orders \7\ executed through the Facilitation
auction on BOX function in substantially the same manner as single-leg
orders executed through this mechanism. To detail how this mechanism
treats Complex Orders, the Exchange proposes to insert IM-7270-7. IM-
7270-7 will state that Participants may use the Facilitation Mechanism
according to paragraph (a) of Rule 7270 to execute block-size Complex
Orders at a net price. The OFP must be willing to execute the entire
size of the Agency Order through the submission of a contra order; and
block-size Complex Orders executed through the Facilitation Mechanism
will continue to be limited to Complex Orders of fifty (50) contracts
per leg or more.\8\
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    \6\ See International Securities Exchange Rule 716 and
Supplementary Material .08 to Rule 716.
    \7\ Under Rule 7240(a)(5) a ``Complex Order'' is defined as
``any order involving the simultaneous purchase and/or sale of two
or more different options series in the same underlying security,
for the same account, in a ratio that is equal to or greater than
one-to-three (.333) and less than or equal to three-to-one (3.00)
and for the purpose of executing a particular investment strategy.)
A Complex Order that does not meet this definition will be
automatically rejected.
    \8\ Complex Orders comprised of less than fifty (50) contracts
on each leg will automatically be rejected.
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    Upon the entry of a block-sized order into the Facilitation
mechanism, a broadcast message will be sent to Options Participants,
giving them one second to enter responses with the prices and sizes at
which they would be willing to participate opposite the Agency Order
(``Responses'').\9\ Responses to a Complex Order within the
Facilitation Auction mechanism may be submitted for any size up to the
size of the entire Complex Order, however, the Responses must be for
all Legs of the unique Complex Order. Responses must be priced at the
price of the Agency Order or at a better price and must not exceed the
size of the Agency Order.\10\ At the end of the one second period for
the entry of Responses, the block-sized Facilitation Complex Order will
be automatically executed with the Agency Order.\11\ However, as is
also the case for single-leg orders executed through the Facilitation
mechanism, if the Facilitation Price is outside the NBBO at the end of
the auction, the auction will be canceled.
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    \9\ The Exchange believes that 1 second is an adequate duration
for the Facilitation Auction. Specifically, the Exchange believes
customers are capable of responding within this duration and has not
received any complaints regarding the duration of the Facilitation
Auction broadcast since the mechanism was adopted in 2011.
    \10\ A Response that doesn't meet the requirements will be
automatically rejected
    \11\ Assuming there are no Responses to the auction or interest
on the BOX Book that could execute against the Agency Order.
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    Identical to the process for single-leg orders, Participants may
enter Responses for Complex Orders in these auctions at net prices, and
bids and offers for Complex Orders will participate in the execution of
an order being executed as provided in paragraphs (a) and (b) of Rule
7270. However, the execution rules for Complex Orders detailed in BOX
Rule 7240(b)(2) and (3) will continue to apply.\12\ For example, if
there is sufficient interest on the BOX Book for the individual legs to
be executed at a permissible ratio, this ``Implied Order'' \13\ will
have priority here and will execute against the Agency Order, provided
that each of its component Legs is equal to or better than its
respective NBBO.
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    \12\ The Exchange notes that this includes the Complex Order
Filter outlined in BOX Rule 7240(b)(3)(iii).
    \13\ An ``Implied Order' is a Complex Order that is derived from
the orders on the BOX Book for each component leg of a strategy.
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    If there is no execution against the Implied Order, the Agency
Order can execute against the Complex Order interest. The priority
rules for the Facilitation Auction,\14\ including the surrender
quantity designation, will continue to apply. The following example
illustrates the execution priority of interest on the BOX Book for a
Complex Order within the Facilitation Auction. An OFP submits a Complex
Order through the Facilitation Order to sell 500 A+B+C at $3.00. During
the one second auction, BOX receives the following bids (offers) in
time priority:
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    \14\ See BOX Rule 7270(a)(3).

(1) Market Maker Complex Order Response to buy 500 of A+B+C at $3.00
(2) Public Customer Complex Order Response to buy 40 A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 500 at $1.00
 Market Maker Option B--Order to buy 500 at $1.00
 Broker Dealer Option C--Order to buy 500 at $1.00

    Since it is possible to execute the entire Complex Order against
interest on the BOX Book (Implied Order) at the same price, the sell
order will execute against the bids on A, B and C at $1.00 for 100
contracts each. And since this execution will exhaust the sell order,
all the Responses, including the Public Customer's Response and the
OFP's Facilitation Order will receive no trade allocation.
    The pricing provision in BOX Rule 7270(a)(3)(i) will apply to
Public Customer Complex Orders and Public Customer Responses. If there
is not sufficient size to execute the entire Agency Order at a better
price and there are Public Customer Complex Order bids (offers) and
Public Customer Responses on BOX at the time the Agency Order is
executed that are priced higher (lower) than the facilitation price,
these will maintain their price priority but execute at the
Facilitation Price.\15\ Non-Public Customer and Market Maker bids
(offers) and Non-Public Customer and Market Maker Responses on BOX at
the time the Agency Order is executed that are priced higher (lower)
than the facilitation price will be executed against the Agency Order
at their stated price, providing the Agency Order [sic] execution at a
better price for the number of contracts associated with such higher
bids (lower offers) and Responses. When an Implied Order executes
against an Agency Order, the Implied Order will be executed at its
stated price.\16\
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    \15\ If there is sufficient interest to execute the Agency Order
at a better price, Public Customer Complex Order bids (offers) will
receive their stated price.
    \16\ See IM-7270-7. The Exchange notes that the provisions of
BOX Rule 7270(a)(3)(i) do not apply to Implied Orders created from
BOX Book interest.
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    The following example illustrates the allocation priority of BOX
Rule 7270(a)(3)(ii). An OFP submits a Complex Order through the
Facilitation auction to sell 500 A+B+C at $3.00. During the one second
auction, BOX receives the following bids (offers) in time priority:

(1) Public Customer #1 Complex Order Response to buy 100 A+B+C at $3.00
(2) Public Customer #2 Complex Order Response to buy 100 A+B+C at $3.02
(3) Market Maker #1 Complex Order Response to buy 105 of A+B+C at $3.06
(4) Market Maker #2 Complex Order Response to buy 95 of A+B+C at $3.04

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 125 at $1.00
 Market Maker Option B--Order to buy 125 at $1.00
 Public Customer Option C--Order to buy 125 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 105 contracts at $3.06 to Market Maker #1 (price priority)
(2) 95 contracts at $3.04 to Market Maker #2 (price priority)
(3) 100 contracts at $3.00 to Public Customer #2 (the Public Customer
retains its price priority, but executes at the facilitation price
because there was not sufficient interest to execute the entire Agency
Order at a Better Price)
(4) 125 contracts at $3.00 to BOX Book Interest (Implied Order) \17\
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    \17\ The Exchange notes that once an Implied Order is created
from BOX Book interest, the Participant types composing the Implied
Order are no longer relevant, and have no impact on execution and
allocation priority.
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(5) 75 contracts at $3.00 to Public Customer #1 (remaining interest is
allocated to the Public Customer at the facilitation price)

    The following example illustrates allocation priority of interest
on the BOX Book over an OFP's allocation priority.\18\ An OFP submits a
Complex Order through the Facilitation auction to sell 500 A+B+C at
$3.00. During the one second auction, BOX receives the following bids
(offers) in time priority:
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    \18\ Under BOX Rule 7270(a)(3)(ii) the OFP is entitled to at
least 40% of the original size of the Facilitation Order after
better-priced bids (offers) and Responses on BOX, as well as Public
Customer bids (offers) and Responses at the facilitation price.

(1) Market Maker #1 Complex Order Response to buy 95 of A+B+C at $3.02
(2) Market Maker #2 Complex Order Response to buy 150 of A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 300 at $1.00
 Market Maker Option B--Order to buy 300 at $1.00
 Public Customer Option C--Order to buy 300 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 95 contracts at $3.02 to Market Maker #1 (price priority)
(2) 300 contracts at $3.00 to BOX Book Interest (Implied Order)
(3) 105 contracts at $3.00 to OFP's Facilitation Order (the OFP
receives the remaining contracts as there is insufficient size to
satisfy the full 40% allocation)

    The final example below illustrates allocation priority when the
OFP has designated a surrender quantity under BOX Rule 7270(a)(3)(iii).
An OFP submits a Complex Order through the Facilitation auction to sell
300 A+B+C at $3.00 with a surrender quantity of 220. During the one
second auction, BOX receives the following bids (offers) in time
priority:

(1) Market Maker #1 Complex Order Response to buy 120 of A+B+C at $3.00

Interest on the BOX Book (Implied Order):

 Market Maker Option A--Order to buy 100 at $1.00
 Market Maker Option B--Order to buy 100 at $1.00
 Public Customer Option C--Order to buy 100 at $1.00

The Facilitated Complex Order will be allocated in the following order:

(1) 100 contracts at $3.00 to BOX Book Interest (Implied Order
Priority)
(2) 80 contracts at $3.00 to OFP's Facilitation Order with a Surrender
Quantity
(3) 120 contracts at $3.00 to Market Maker #1
2. Statutory Basis
    The Exchange believes that the proposal is consistent with the
requirements of section 6(b) of the Act,\19\ in general, and section
6(b)(5) of the Act,\20\ in particular, in that it is designed to
prevent fraudulent and manipulative acts and practices, to promote just
and equitable principles of trade, to remove impediments to, and
perfect the mechanism of, a free and open market and a national market
system, and, in general, to protect investors and the public interest.
In particular, the Exchange believes that the proposed rule change to
amend BOX Rule 7270 to provide for the execution of Complex Orders
through the Facilitation Auction mechanism on BOX. [sic] This proposed
rule change is designed to help BOX remain competitive among options
exchanges and provide market participants additional opportunities to
execute block-size crossing transactions.
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    \19\ 15 U.S.C. 78f(b).
    \20\ 15 U.S.C. 78f(b)(5).
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(B) Self-Regulatory Organization's Statement on Burden on Competition

    The proposed change provides for the execution of Complex Orders
through the Facilitation auction mechanism. As such, the Exchange does
not believe that the proposed rule change will impose any burden on
competition not

necessary or appropriate in furtherance of the purposes of the Act. The
Exchange does not believe the proposal will impose any burden on
intermarket competition, as the proposed rule will allow BOX to compete
with other options exchanges in the industry. Specifically, ISE has a
similar mechanism in place.\21\ Additionally, the Exchange does not
believe the proposal will impose any burden on intramarket competition,
as the Facilitation Auction mechanism is available to all Participants
and all OFPs may submit orders through the mechanism.
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    \21\ See supra note 5.
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(C) Self-Regulatory Organization's Statement on Comments on the
Proposed Rule Change Received From Members, Participants or Others

    The Exchange has neither solicited nor received comments on the
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action

    (a) This proposed rule change is filed pursuant to paragraph (A) of
section 19(b)(3) of the Exchange Act \22\ and Rule 19b-4(f)(6)
thereunder.\23\
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    \22\ 15 U.S.C. 78s(b)(3)(A).
    \23\ 17 CFR 240.19b-4(f)(6). In addition, Rule 19b-4(f)(6)(iii)
under the Exchange Act requires the Exchange to give the Commission
written notice of the Exchange's intent to file the proposed rule
change, along with a brief description and text of the proposed rule
change, at least five business days prior to the date of filing of
the proposed rule change, or such shorter time as designated by the
Commission. BOX has satisfied this requirement.
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    (b) Because this proposed rule change does not significantly affect
the protection of investors or the public interest, does not impose any
significant burden on competition, and, by its terms, does not become
operative for 30 days after the date of the filing, or such shorter
time as the Commission may designate, it has become effective pursuant
to section 19(b)(3)(A) of the Act and Rule 19b-4(f)(6) thereunder.
    At any time within 60 days of the filing of the proposed rule
change, the Commission summarily may temporarily suspend such rule
change if it appears to the Commission that such action is necessary or
appropriate in the public interest, for the protection of investors, or
otherwise in furtherance of the purposes of the Act. If the Commission
takes such action, the Commission shall institute proceedings to
determine whether the proposed rule should be approved or disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number SR-BOX-2016-37 on the subject line.

Paper Comments

     Send paper comments in triplicate to Brent J. Fields,
Secretary, Securities and Exchange Commission, 100 F Street NE.,
Washington, DC 20549-1090.

All submissions should refer to File Number SR-BOX-2016-37. This file
number should be included on the subject line if email is used. To help
the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for Web site viewing and
printing in the Commission's Public Reference Room, 100 F Street NE.,
Washington, DC 20549, on official business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the filing will also be available
for inspection and copying at the principal office of the Exchange. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File Number SR-BOX-2016-37 and should be
submitted on or before August 25, 2016.

    For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\24\
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    \24\ 17 CFR 200.30-3(a)(12).
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Robert W. Errett,
Deputy Secretary.
[FR Doc. 2016-18471 Filed 8-3-16; 8:45 am]
 BILLING CODE 8011-01-P


[Federal Register: April 16, 2010 (Volume 75, Number 73)]
[Notices]
[Page 19956]
[DOCID:fr16ap10-50]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

[Project No. 3156-030]

Miller and Miller, Waterpower LLC; Notice of Application for
Transfer of License and Soliciting Comments and Motions To Intervene

April 9, 2010.
    On March 19, 2010, Miller and Miller (transferor) and Waterpower,
LLC (transferee) filed an application for transfer of license of the
Worthville Dam Project No. 3156, located on the Deep River in Randolph
County, North Carolina.
    Applicants seek Commission approval to transfer the license for the
Worthville Dam Project from the transferor to the transferee.
    On February 17, 2010, the Commission issued a Notice of Termination
of License by Implied Surrender and Soliciting Comments, Protests, and
Motions to Intervene for the Worthville Dam Project (P-3156-029). On
March 19, 2010, Waterpower, LLC filed a motion to intervene and protest
in the termination proceeding.
    Applicants' Contact: Mr. Mark K. Seifert, Attorney at Law, 107
Saint Brides Court, Cary, NC;<PHONE_NUMBER>.
    FERC Contact: Robert Bell,<PHONE_NUMBER>.
    Deadline for filing comments and motions to intervene: 30 days from
the issuance of this notice. Comments and motions to intervene may be
filed electronically via the Internet. See 18 CFR
385.2001(a)(1)(iii)(2008) and the instructions on the Commission's Web
site under the ``e-Filing'' link. If unable to be filed electronically,
documents may be paper-filed. To paper-file, an original and eight
copies should be mailed to: Kimberly D. Bose, Secretary, Federal Energy
Regulatory Commission, 888 First Street, NE., Washington, DC 20426. For
more information on how to submit these types of filings please go to
the Commission's Web site located at http://www.ferc.gov/filing-
comments.asp. More information about this project can be viewed or
printed on the eLibrary link of Commission's Web site at http://
www.ferc.gov/docs-filing/elibrary.asp. Enter the docket number (P-3156-
030) in the docket number field to access the document. For assistance,
call toll-free 1-866-208-3372.

Kimberly D. Bose,
Secretary.
[FR Doc. 2010-8704 Filed 4-15-10; 8:45 am]
BILLING CODE 6717-01-P


[Federal Register: October 27, 2005 (Volume 70, Number 207)]
[Proposed Rules]
[Page 61930-61933]
[DOCID:fr27oc05-15]

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DEPARTMENT OF ENERGY

Federal Energy Regulatory Commission

18 CFR Parts 47 and 159

[Docket No. RM06-3-000]

Prohibition of Energy Market Manipulation

Issued October 20, 2005.
AGENCY: Federal Energy Regulatory Commission, DOE.

ACTION: Notice of proposed rulemaking.

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SUMMARY: Pursuant to Title III, Subtitle B, and Title XII, Subtitle G
of the Energy Policy Act of 2005, the Federal Energy Regulatory
Commission (Commission) is proposing rules to implement new section 222
of the Federal Power Act and new section 4A of the Natural Gas Act,
prohibiting the employment of manipulative or deceptive devices or
contrivances. The Commission seeks public comment on the regulations
proposed herein.

DATES: Comments are due November 17, 2005. Reply comments are due
November 25, 2005.

ADDRESSES: Comments may be filed electronically via the eFiling link on
the Commission's Web site at http://www.ferc.gov. Commenters unable to

file comments electronically must send an original and 14 copies of
their comments to: Federal Energy Regulatory Commission, Office of the
Secretary, 888 First Street NE., Washington, DC 20426. Refer to the
Comment Procedures section of the preamble for additional information
on how to file comments.

FOR FURTHER INFORMATION CONTACT: Frank Karabetsos, Office of General
Counsel, Federal Energy Regulatory, Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>    Mark Higgins, Office of Market Oversight and Investigations,
Federal Energy Regulatory Commission, 888 First Street, NE.,
Washington, DC 20426,<PHONE_NUMBER><EMAIL_ADDRESS>
SUPPLEMENTARY INFORMATION:

Introduction

    1. On August 8, 2005, the Energy Policy Act of 2005 (EPAct 2005)
\1\ was signed into law. Sections 315 and 1283 of EPAct 2005, amending
the Natural Gas Act \2\ and the Federal Power Act,\3\ respectively, are
virtually identical, and prohibit the use or employment of manipulative
or deceptive devices or contrivances in connection with the purchase or
sale of natural gas, electric energy, or transportation or transmission
services subject to the jurisdiction of the Commission. These anti-
manipulation sections of EPAct 2005 closely track the prohibited
conduct language in section 10(b) of the Securities Exchange Act of
1934,\4\ and specifically dictate that the terms ``manipulative or
deceptive device or contrivance'' are to be used ``as those terms are
used in section 10(b).''
    2. The Securities and Exchange Commission (SEC) has adopted Rule
10b-5,\5\ which implemented section 10(b) of the Exchange Act, and has
developed a significant body of legal precedent related to both section
10(b) of the Exchange Act and Rule 10b-5. Consistent with the mandate
that the Commission's new authority be exercised in a manner consistent
with section 10(b) of the Exchange Act, the Commission has modeled its
proposed regulations on Rule 10b-5.\6\ This approach should provide
benefits to entities subject to the new rule because there is a
substantial body of precedent

applying the comparable language of Rule 10b-5.
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    \1\ Energy Policy Act of 2005, Pub. L. 109-58, 119 Stat. 594
(2005).
    \2\ 15 U.S.C. 717 et al. (2004).
    \3\ 16 U.S.C. 791a et al. (2004).
    \4\ Securities and Exchange Act of 1934, 15 U.S.C. 78j(b) (2005)
(Exchange Act).
    \5\ 17 CFR 240.10b-5 (2005).
    \6\ This reliance on the use of SEC precedent is consistent with
Congress' expressed intent in sections 315 and 1283 that any
``manipulative or deceptive device or contrivance'' is prohibited
``as those terms are used in section 10(b) of the Securities and
Exchange Act of 1934'' and Congress' modeling sections 315 and 1283
of EPAct 2005 after section 10(b) of the Exchange Act.
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    3. In this Notice of Proposed Rulemaking (NOPR), the Commission
proposes to add a Part 47 under Subchapter B (Regulations under the
Federal Power Act) and a Part 159 under Subchapter E (Regulations under
the Natural Gas Act) to Title 18 of the Code of Federal Regulations,
and intends to issue final regulations by December 31, 2005. The
Commission seeks comments on its proposals for the regulations
discussed below.

Background

    4. In November 2003, the Commission issued the Market Behavior
Rules to fill a void in the regulation of market-based trading
activity.\7\ The Market Behavior Rules emanated from the Commission's
investigation of trading activity in Western markets during 2000-2001,
which uncovered a number of trading schemes intended to take advantage
of the then-existing electricity market in California.\8\ The
Commission also discovered abuses in reporting of natural gas prices to
price index publishers for purposes of manipulating price indices.\9\
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    \7\ Investigation of Terms and Conditions of Public Utility
Market-Based Rate Authorizations, ``Order Amending Market-Based Rate
Tariffs and Authorizations,'' 105 FERC ] 61,218 (2003), reh'g
denied, 107 FERC ] 61,175 (2004); Order No. 644, Amendment to
Blanket Sales Certificates, FERC Stats. & Regs. ] 31,153 (2003),
reh'g denied, 107 FERC ] 61,174 (2004).
    \8\ See Final Report on Price Manipulation in Western Markets:
Fact-Finding Investigation of Potential Manipulation of Electric and
Natural Gas Prices, Docket No. PA02-2-000 (March 2003) (Final
Report); see also American Elec. Power Serv. Corp., 103 FERC ]
61,345 (2003), reh'g denied, 106 FERC ] 61,020 (2004); Enron Power
Mktg., Inc., 103 FERC ] 61,346 (2003), reh'g denied, 106 FERC ]
61,020 (2004).
    \9\ Final Report, Docket No. PA02-2-000 (March 2003); Policy
Statement on Natural Gas and Electric Price Indices, 104 FERC ]
61,121 at 61,404 (2003) (addressing price index reporting abuses).
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    5. The Market Behavior Rules were adopted to establish guidelines
applicable to the conduct of jurisdictional market-based rate sellers
in wholesale power markets and to jurisdictional companies engaged in
wholesale sales of natural gas under blanket certificate authority.
    6. An important provision of the Market Behavior Rules is Rule 2,
which states that ``[a]ctions or transactions that are without a
legitimate business purpose and that are intended to or foreseeably
could manipulate market prices, market conditions, or market rules for
electric energy or electricity products are prohibited.'' \10\ In
addition, Market Behavior Rule 2(a) expressly prohibits wash trades,
Rule 2(b) prohibits transactions predicated on submitting false
information, Rule 2(c) prohibits creating and relieving artificial
congestion, and Rule 2(d) prohibits collusion.\11\
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    \10\ Investigations of Terms and Conditions of Public Utility
Market-Based Rate Authorizations, 105 FERC ] 61,218 at Appendix A
(2003). Sections 284.288(a) and 284.403(a) of the Commission's
regulations, promulgated in Order No. 644, contain substantially
similar language: a pipeline that provides unbundled natural gas
service under section 284.284 or any person making natural gas sales
for resale in interstate commerce pursuant to section 284.402 ``is
prohibited from engaging in actions or transactions that are without
a legitimate business purpose and are intended to or foreseeably
could manipulate market prices, market conditions, or market rules
for natural gas.'' The Market Behavior Rules are currently being
appealed. See Cinergy Mktg. & Trading, L.P. v. FERC, Docket No. 04-
1168 et al. (D.C. Cir. 2005).
    \11\ Order No. 644 expressly prohibits wash trades and collusion
for natural gas sellers.
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    7. Sections 315 and 1283 of EPAct 2005 enhance the Commission's
authority to prohibit manipulation of the energy markets. However,
neither section 315 nor 1283 is a self-actuating provision. This
rulemaking fulfills Congress' intent in adopting these provisions.

The Commission's Proposed Regulations

    8. Pursuant to section 4A of the Natural Gas Act and section 222 of
the Federal Power Act, as added to the statutes by EPAct 2005, the
Commission proposes to add a Part 47 under Subchapter B and a Part 159
under Subchapter E to Title 18 of the Code of Federal Regulations.
Under these proposed regulations, it shall be unlawful for any entity,
directly or indirectly, in connection with the purchase or sale of
electric energy or the purchase or sale of transmission services
subject to the jurisdiction of the Commission, or in connection with
the purchase or sale of natural gas or the purchase or sale of
transportation services subject to the jurisdiction of the Commission,
(1) to use or employ any device, scheme, or artifice to defraud, (2) to
make any untrue statement of a material fact or to omit to state a
material fact necessary in order to make the statements made, in the
light of the circumstances under which they were made, not misleading,
or (3) to engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon any person.
    9. Sections 315 and 1283 of EPAct 2005 apply to ``any entity.''
Indeed, section 1283 expressly includes an ``entity described in
section 201(f).'' Accordingly, these proposed regulations apply to the
conduct of ``any entity,'' not just jurisdictional market-based rate
sellers, natural gas pipelines, or holders of blanket certificate
authority. ``[A]ny entity'' includes not only regulated utilities but
also governmental utilities and other market participants.\12\
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    \12\ The Commission intends that the principles discussed in the
Policy Statement on Enforcement that we are issuing today in Docket
No. PL06-1-000 will also apply to ``any entity'' as defined herein.
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    10. As discussed in more detail below, subsections (a)(1)-(3) of
these proposed regulations are patterned after the SEC's Rule 10b-5,
and are intended to be interpreted consistent with analogous SEC
precedent that is appropriate under the circumstances. Subsection (b)
of the Commission's proposed regulations states that nothing in these
provisions shall be construed to create a private right of action.\13\
This language is based expressly on sections 315 and 1283 of EPAct
2005, and reflects Congress' intent that entities will not be subject
to civil actions by third parties based on alleged violations of these
proposed regulations.
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    \13\ However, subsection (b) is not intended to take away any
other right that may otherwise exist.
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Securities and Commodity Law Precedent

    11. The Exchange Act addresses regulation of the securities
markets. One of the most important provisions of the Exchange Act is
section 10(b), which prohibits the use of ``any manipulative or
deceptive device or contrivance'' in contravention of SEC Rules.\14\
The SEC promulgated Rule 10b-5 to enforce section 10(b).\15\
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    \14\ 15 U.S.C. 78j(b) (2005).
    \15\ Rule 10b-5 of the U.S. Securities and Exchange Commission
reads:
    It shall be unlawful for any person, directly or indirectly, by
the use of any means or instrumentality of interstate commerce, or
of the mails or of any facility of any national securities exchange,
    (a) To employ any device, scheme, or artifice to defraud,
    (b) To make any untrue statement of a material fact or to omit
to state a material fact necessary in order to make the statements
made, in the light of the circumstances under which they were made,
not misleading, or
    (c) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of any security.
    17 CFR 240.10b-5 (2005).
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    12. Section 10(b) and Rule 10b-5 might ``well be the most litigated
provisions in the federal securities laws,'' \16\ having been described
by the Supreme Court as ``a judicial oak which has grown from little
more than a legislative acorn.'' \17\ The vast body of

section 10(b) case law provides substantial certainty to entities
subject to section 10(b) because it has resolved many recurring
questions of interpretation that have arisen under the rule.
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    \16\ SEC v. National Sec., Inc., 393 U.S. 453, 465 (1969).
    \17\ Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723, 737
(1975); see also Louis Loss & Joel Seligman, Securities Regulations
Sec.  9-B-3 (3d. ed. 2004) (regarding Rule 10b-5 ``[i]t is difficult
to think of another instance in the entire corpus juris in which the
interaction of the legislative, administrative rulemaking, and
judicial processes has produced so much from so little.'').
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    13. Section 4b of the Commodity Exchange Act (CEA) is the Commodity
Futures Trading Commission's (CFTC) general anti-fraud rule.\18\
Section 4b makes it unlawful for any person to ``cheat or defraud or
attempt to cheat or defraud,'' or to make false reports or statements,
or to deceive or attempt to deceive another in transactions under the
CFTC's jurisdiction. Although the statutory language of section 10(b)
of the Exchange Act and section 4b of the CEA are not identical, the
Supreme Court stated that they are ``analogous'' and ``[t]he language
of Sec.  4b [of the CEA] is similar to that of Sec.  10(b) of the
Securities Exchange Act of 1934.'' \19\ Lower courts have gone further,
noting that ``the elements of a claim under Sec.  4(b)(A) are basically
the same as those under Rule 10b-5.'' \20\
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    \18\ 7 U.S.C. 6b (2005).
    \19\ Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S.
353, 389 (1982).
    \20\ Trustman v. Merrill Lynch, Pierce, Fenner & Smith, 1985
U.S. Dist. LEXIS 23154 at * 38; Fed. Sec. L. Rep. (CCH) P91,936
(C.D.C.A. 1985); see also, Drexel Burnham Lambert, Inc. v. Commodity
Futures Trading Comm'n, 850 F.2d 742, 748 (D.C. Cir. 1988) (court
held recklessness satisfied the scienter requirement for section 4b
just as it does under section 10(b) and Rule 10b-5).
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    14. The Commission proposes to pattern proposed sections 47.1 and
159.1 of its regulations on the text of Rule 10b-5. This is not only
consistent with the clear intent of sections 315 and 1283 of EPAct
2005, but also should benefit the industry because it will provide
greater certainty to entities subject to the new rules because the
Commission intends to rely on the large body of case law interpreting
and applying section 10(b) and Rule 10b-5 when applying its new
authority.\21\
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    \21\ EPAct 2005, with its references to Section 10(b) of the
Exchange Act, provides a level of substantial certainty with respect
to how the proposed regulations will operate that the Commission is
not typically able to provide where a preexisting body of law and
precedent is not readily available.
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The Relationship of the Proposed Rules to the Commission's Market
Behavior Rules

    15. Both Market Behavior Rule 2 and the proposed regulations
prohibit manipulative conduct. For now, Market Behavior Rule 2 is
retained, an approach consistent with that taken by both the SEC and
CFTC.\22\ However, the Commission will address the possibility of
revising or repealing Market Behavior Rule 2, and will seek comments in
the near future. Moreover, as explained in the concurrent Policy
Statement on Enforcement that we are issuing today (discussed below),
we will not seek duplicative sanctions for the same conduct in the
event that conduct violates both Market Behavior Rule 2 and proposed
section 47.1.\23\
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    \22\ For example, section 10(b) and Rule 10b-5, the SEC's
general anti-fraud provision (the Supreme Court described section
10(b) as a ``general prohibition of practices * * * artificially
affecting market activity in order to mislead investors'' designed
as a broad anti-fraud ``catch-all clause.'' Schreiber v. Burlington
Northern, Inc., 472 U.S. 1, 6-7 (1985); Aaron v. SEC, 446 U.S. 680,
690 (1980)), exists alongside other, more targeted provisions,
including but not limited to: section 9(a)(2) prohibiting
manipulative conduct on national securities exchanges (15 U.S.C. 78i
(2005)); section 14(e) prohibiting any person from making material
misstatements or omissions and from engaging in fraudulent conduct
in connection with any tender offer (15 U.S.C. 78n(e) (2005)); and
section 17(a) prohibiting fraud in connection with the sale of
securities (15 U.S.C. 77q(a) (2005)). Similarly, the CFTC's general
anti-fraud provision in section 4b exists alongside other CFTC anti-
manipulation provisions, including but not limited to: section 4o
prohibiting fraud by commodity trading advisors and commodity pool
operators (7 U.S.C. 6m (2005)); Rule 30.9 prohibiting fraud in
connection with foreign futures contracts (17 CFR 30.9 (2005)); and
Rule 32.9 prohibiting fraud in connection with commodity option
transactions (17 CFR 32.9 (2005)).
    \23\ The Commission will likewise not seek duplicative sanctions
from natural gas sellers for the same conduct in the event that
conduct violates both the Market Behavior Rules, 18 CFR 284.288(a)
or 284.403(a) (2005), and proposed section 159.1.
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Concurrent Policy Statement on Enforcement

    16. The Commission's new EPAct 2005 authority under the anti-
manipulation provisions coupled with expanded civil penalty
authority,\24\ provides us with more effective tools to assure workably
competitive markets. The Commission is concurrently issuing a Policy
Statement on Enforcement that sets out guidelines on the Commission's
enforcement policies and practices and on how we will exercise our new
civil penalty authority.\25\ The Policy Statement, like these new
proposed regulations, draws from the experience of other Federal
agencies, including the SEC and the CFTC, in explaining the factors
that will be taken into account in applying remedies for misconduct,
including the imposition of civil penalties. The Policy Statement
provides that the Commission will exercise its enhanced authority in a
firm but fair manner, and will take mitigating factors into account in
resolving violations.\26\
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    \24\ Sections 314 and 1284 of EPAct 2005.
    \25\ Policy Statement on Enforcement, Docket No. PL06-1-000.
    \26\ Id.
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Information Collection Statement

    17. This proposed rule implements the existing requirements as set
forth in sections 315 and 1283 of EPAct 2005 and does not include new
information requirements under the provisions of the Paperwork
Reduction Act of 1995 (44 U.S.C. 3501 et seq.).

Environmental Analysis

    18. The Commission is required to prepare an Environmental
Assessment or an Environmental Impact Statement for any action that may
have a significant adverse effect on the human environment.\27\ The
Commission has categorically excluded certain actions from these
requirements as not having a significant effect on the human
environment.\28\ The actions proposed here fall within categorical
exclusions in the Commission's regulations for rules that are
clarifying, corrective, or procedural, for information gathering,
analysis, and dissemination, and for sales, exchange, and
transportation of electric power that requires no construction of
facilities.\29\ Therefore, an environmental assessment is unnecessary
and has not been prepared in this NOPR.
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    \27\ Order No. 486, Regulations Implementing the National
Environmental Policy Act, 52 FR 47897 (Dec. 17, 1987), FERC Stats. &
Regs., Regulations Preambles 1986-1990 ] 30,783 (1987).
    \28\ 18 CFR 380.4 (2005).
    \29\ See 18 CFR 380.4(a)(2)(ii), 380.4(a)(5), 380.4(a)(27)
(2005).
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Regulatory Flexibility Act

    19. The Regulatory Flexibility Act of 1980 (RFA) \30\ generally
requires a description and analysis of final rules that will have
significant economic impact on a substantial number of small
entities.\31\ The Commission is not required to make such analyses if a
rule would not have such an effect.
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    \30\ 5 U.S.C. 601-12 (2000).
    \31\ The RFA definition of ``small entity'' refers to the
definition provided in the Small Business Act, which defines a
``small business concern'' as a business that is independently owned
and operated and that is not dominant in its field of operation. 15
U.S.C. 632 (2000). The Small Business Size Standards component of
the North American Industry Classification System defines a small
electric utility as on that, including its affiliates, is primarily
engaged in the generation, transmission, and/or distribution of
electric energy for sale and whose total electric output for the
preceding fiscal years did not exceed 4 million MWh. 13 CFR 121.201
(2004) (Section 22, Utilities, North American Industry
Classification System, NAICS).
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    20. The Commission does not believe that this proposed rule would
have such an impact on small entities. This proposed rule prohibits all
entities,

including small entities, from employing manipulative or deceptive
devices or contrivances, and therefore may cause entities, including
potentially small entities, to increase costs in order to comply. This
prohibition, however, will improve market transparency to the economic
benefit of all entities, including small entities. Therefore, the
Commission certifies that this proposed rule, if finalized, will not
have a significant economic impact on a substantial number of small
entities.

Comment Procedures

    21. The Commission invites interested persons to submit comments on
the matters and issues proposed in this notice to be adopted, including
any related matters or alternative proposals that commenters may wish
to discuss. Comments are due November 17, 2005. Reply comments are due
seven days thereafter. Comments must refer to Docket No. RM06-3-000,
and must include the commenter's name, the organization they represent,
if applicable, and their address in their comments. Comments may be
filed either in electronic or paper format.
    22. Comments may be filed electronically via the eFiling link on
the Commission's Web site at http://www.ferc.gov. The Commission

accepts most standard word processing formats and commenters may attach
additional files with supporting information in certain other file
formats. Commenters filing electronically do not need to make a paper
filing. Commenters that are not able to file comments electronically
must send an original and 14 copies of their comments to: Federal
Energy Regulatory Commission, Office of the Secretary, 888 First Street
NE., Washington, DC 20426.
    23. All comments will be placed in the Commission's public files
and may be viewed, printed, or downloaded remotely as described in the
Document Availability section below. Commenters on this proposal are
not required to serve copies of their comments on other commenters.

Document Availability

    24. In addition to publishing the full text of this document in the
Federal Register, the Commission provides all interested persons an
opportunity to view and/or print the contents of this document via the
Internet through FERC's Home Page (http://www.ferc.gov) and in FERC's

Public Reference Room during normal business hours (8:30 a.m. to 5 p.m.
eastern time) at 888 First Street, NE., Room 2A, Washington, DC 20426.
    25. From FERC's Home Page on the Internet, this information is
available in the eLibrary. The full text of this document is available
in the eLibrary both in PDF and Microsoft Word format for viewing,
printing, and/or downloading. To access this document in eLibrary, type
the docket number excluding the last three digits of this document in
the docket number field.
    26. User assistance is available for eLibrary and the FERC's Web
site during our normal business hours. For assistance contact FERC
Online Support at<EMAIL_ADDRESS>or toll-free at (866) 208-
3676, or for TTY, contact<PHONE_NUMBER>.

List of Subjects

18 CFR Part 47

    Electric utilities, Electric power, Investigations, Penalties.

18 CFR Part 159

    Natural Gas, Pipelines, Investigations, Penalties.

    By direction of the Commission.
Magalie R. Salas,
Secretary.
    In consideration of the foregoing, the Commission proposes to amend
Chapter I, Title 18, Code of Federal Regulations, as follows:
    1. Part 47 is added to read as follows:

PART 47--PROHIBITION OF ENERGY MARKET MANIPULATION

    Authority: 16 U.S.C. 791-825r, 2601-2645; 42 U.S.C. 7101-7352.

Sec.  47.1  Prohibition of energy market manipulation.

    (a) It shall be unlawful for any entity, directly or indirectly,
    (1) To use or employ any device, scheme, or artifice to defraud,
    (2) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or
    (3) To engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of electric energy or the purchase
or sale of transmission services subject to the jurisdiction of the
Commission.
    (b) Nothing in this Sec.  47.1 shall be construed to create a
private right of action.
    2. Part 159 is added to read as follows:

PART 159--PROHIBITION OF ENERGY MARKET MANIPULATION

    Authority: 15 U.S.C. 717-717z; 42 U.S.C. 7101-7352.

Sec.  159.1  Prohibition of energy market manipulation.

    (a) It shall be unlawful for any entity, directly or indirectly,
    (1) To use or employ any device, scheme, or artifice to defraud,
    (2) To make any untrue statement of a material fact or to omit to
state a material fact necessary in order to make the statements made,
in the light of the circumstances under which they were made, not
misleading, or
    (3) To engage in any act, practice, or course of business that
operates or would operate as a fraud or deceit upon any person, in
connection with the purchase or sale of natural gas or the purchase or
sale of transportation services subject to the jurisdiction of the
Commission.
    (b) Nothing in this Sec.  159.1 shall be construed to create a
private right of action.

[FR Doc. 05-21423 Filed 10-26-05; 8:45 am]

BILLING CODE 6717-01-P