[Federal Register: April 7, 2000 (Volume 65, Number 68)]
[Notices]
[Page 18312-18314]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07ap00-59]
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COMMODITY FUTURES TRADING COMMISSION
Chicago Mercantile Exchange's Proposal To Adopt Block Trading
Procedures
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed new Chicago Mercantile Exchange Rule 526 to
establish block trading procedures and request for comment.
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SUMMARY: The Chicago Mercantile Exchange (``CME'' or ``Exchange'') has
submitted proposed new Rule 526 to the Commodity Futures Trading
Commission (``Commission'') that would establish block trading
procedures at the Exchange. Under these procedures, qualified market
participants would be allowed to negotiate and arrange futures
transactions of a minimum size bilaterally away from the centralized,
competitive market. Once the specific terms of the block transaction
have been agreed to, the counterparties would report the relevant
details of the transaction to a designated Exchange official for
clearing and settlement. The CME is seeking to allow block trading in
its Five-Year and Ten-Year Agency Note futures contracts on a one-year
pilot program basis. This proposal is the second contract market
proposal that the Commission has received that would allow block
trading.
Acting pursuant to the authority delegated by Commission Regulation
140.96(b), the Division of Trading and Markets (``Division'') has
determined to publish the CME's proposal for public comment. The
Division believes that publication of the proposal is in the public
interest and will assist the Commission in considering the views of
interested persons.
DATES: Comments must be received on or before April 24, 2000.
ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary,
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Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW., Washington, DC 20581. Comments also may be sent by
facsimile (202) 418-5221 or by electronic mail to [email protected].
Reference should be made to the ``Chicago Mercantile Exchange's
Proposal to Adopt Block Trading Procedures.''
FOR FURTHER INFORMATION CONTACT: David P. Van Wagner, Associate
Director, Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW, Washington,
DC 20581. Telephone (202) 418-5430.
SUPPLEMENTARY INFORMATION:
I. Background
On June 4, 1999, the Commission issued an Advisory on Alternative
Execution, or Block Trading, Procedures for the Futures Industry.\1\
Through this Advisory, the Commission announced its intention to
consider contract market proposals to adopt alternative execution, or
block trading, procedures for large size or other types of orders on
case-by-case basis under a flexible approach to the requirements of the
Commodity Exchange Act (``Act'') and the Commission's regulations.
Under this approach, each contract market retains the discretion to
permit alternative executive procedures and has the ability to develop
procedures that reflect the particular characteristics and needs of its
individual markets and market participants.
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\1\ 64 FR 31195 (June 10, 1999); 64 FR 34851 (corrections). The
Commission first raised the subject of alternative execution, or
block trading, procedures in its Concept Release on the Regulation
of Noncompetitive Transaction Executed on or Subject to the Rules of
a Contract Market. 63 FR 3708 (January 26, 1998). Through the
Concept Release, the Commission wished to explore whether certain
alternative executive procedures for large size or other types of
orders could be developed to satisfy the needs of market
participants while furthering the policies and purposes of the
Commodity Exchange Act and the Commission's Regulations.
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After the issuance of the Advisory, in September of 1999, the New
York Board of Trade, on behalf of the Cantor Financial Futures
Exchange, Inc. (``CX''), submitted proposed new rules and rule
amendments to the Commission that would establish block trading
procedures at the CX\2\ The CX proposal was the first contract market
proposal to allow block trading that the Commission has received. On
February 11, 2000, the Commission approved the CX's block trading
proposal for its U.S. Treasury Bond, U.S. Treasury Ten-Year Note,
Flexible Coupon U.S. Treasury Bond, and Flexible Coupon U.S. Treasury
Ten-Year Note futures contracts on a one-year pilot program basis
pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulations
1.38 and 1.41(c).
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\2\ The CX's block trading proposal was published in the Federal
Register for public comment on October 7, 1999. 64 FR 54620.
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By letters dated February 25, 2000, through March 23, 2000, the CME
submitted proposed new Rule 526 to the Commission pursuant to Section
5a(a)(12(A) of the Act and Commission Regulation 1.41(c). Proposed CME
Rule 526 would establish block trading procedures at the Exchange
whereby qualified market participants would be allowed to negotiate and
arrange futures transactions of a minimum size bilaterally away from
the centralized, competitive market. Once the specific terms of the
block transaction have been agreed to, the counterparties would report
the relevant details of the transaction to a designated Exchange
official for clearing and settlement. Thus, under the proposed
procedures, certain futures transactions could be executed
noncompetitively rather than through the Exchange's open outcry trading
platform or through its GLOBEX2 electronic trading system.
II. Description of the Proposed Block Trading Procedures
A. Eligible Contracts and Market Participants
At the present time, the only contracts that would be eligible for
the CME's proposed block trading procedures are its Five-year and Ten-
Year and Ten-Year Agency Note futures contracts.\3\ The CME is seeking
to allow block trading in these contracts on a one-year pilot program
basis. The CME could make additional contracts eligible for the block
trading procedures subject to the approval of its Board of Directors
(or a Committee appointed by the Board) and of the Commission.
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\3\ The Commission approved the CME's application for
designation as a contract market in the Five-Year and Ten Year
Agency Note futures contracts on March 13, 2000. The current trading
hours for these contracts are as follows: 7:20 a.m.-2 p.m. Central
Time Monday through Friday for open outcry trading; 2:10 p.m.--7:05
a.m. Central Time Monday through Thursday for GLOBEX2 trading; and
5:30 p.m.--7:05 a.m. Central Time Sundays and holidays for GLOBEX2
trading.
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Proposed CME Rule 526 would restrict block trading to those market
participants that qualify as an ``eligible participant'' as that term
is defined by Commission regulation 36.1. In addition, each block order
must include specific instructions that such order is to be executed
pursuant to the proposed block trading procedures.
In connection with block trades entered into by a commodity trading
advisor (``CTA'') on behalf of its customers, and provided that certain
registration and financial conditions are satisfied,\4\ The CTA (and
not its underlying customers) would be responsible for meeting the
eligibility requirements described above. Accordingly, the CTA would be
able to enter into such transactions on behalf of customers without
these customers having to qualify as ``eligible participants'' under
Commission regulation 36.1 or to specifically authorize the use of the
block trading procedures.
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\4\ The CTA must be registered under the Act (which includes
without limitation any investment advisor registered as such with
the Securities and Exchange Commission that is exempt from
regulation under the Act or the Commission's regulations) with total
assets under management exceeding $50 million.
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B. Size and Price Requirements
Under proposed CME Rule 526, each buy or sell order underlying a
block trade must satisfy the applicable minimum size requirement as
determined by the CME's Board of Directors or by a Committee appointed
by the Board. In the case of the CME's Five-year and Ten-Year Agency
Note futures contracts, the minimum threshold will be 200 contracts.\5\
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\5\ In connection with block trades entered into by a CTA (which
satisfies certain registration and financial conditions) on behalf
of its customers, the underlying customer orders do not have to
satisfy the minimum threshold requirement. Accordingly, a CTA
registered under the Act (including without limitation any
investment advisor registered as such with the Securities and
Exchange Commission that is exempt from regulation under the Act or
the Commission's regulations) with total assets under management
exceeding $50 million may aggregate orders from different accounts
to satisfy the minimum size requirement.
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The price at which a block trade is executed must be ``fair and
reasonable'' in light of the following factors: (1) The size of such
block trade; (2) the prices and sizes of other transactions in the same
contract at the relevant time; (3) the prices and sizes of transactions
in other relevant markets; including the underlying cash and futures
markets, at the relevant time; and (4) the circumstances of the parties
to the block trade.
C. Transparency
Each block trade must be reported to a designated Exchange within
five minutes of the time of execution. \6\ Such
[[Page 18314]]
report must include information identifying the relevant contract,
contract month, price, and quantity of the transaction. In addition,
clearing firms must report each block trade to the Exchange Clearing
House--including the time of execution--in accordance with the Clearing
House Manual of Operations. The CME will immediately publicize block
trade information separately from the reports of transactions in the
regular, competitive market.
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\6\ Completed block transactions may be reported to the Exchange
in one of two ways: (1) through telephone to the Exchange's GLOBEX
Control Center from 5:30 p.m. Central Time on Sunday through 2:00
p.m. Central time on Friday; and (2) through select price reporting
terminals available on the Exchange floor during Regular Trading
Hours (7:30 a.m.--2:00 p.m. Central Time) Monday through Friday.
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III. Request for Comment
The Commission request comment from interested persons concerning
any aspects of the CME's proposed block trading procedures.
Copies of the CME's proposed new Rule 526 and related materials are
available for inspection at the Office of the Secretariat, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
NW., Washington, DC 20581. Copies also may be obtained through the
Office of the Secretariat at the above address or by telephoning (202)
418-5100.
Issued in Washington, DC, on April 3, 2000.
John C. Lawton,
Acting Director.
[FR Doc. 00-8604 Filed 4-6-00; 8:45 am]
BILLING CODE 6351-01-M
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