[Federal Register: June 9, 2000 (Volume 65, Number 112)]
[Notices]
[Page 36667-36670]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09jn00-45]
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COMMODITY FUTURES TRADING COMMISSION
Application of BrokerTec Futures Exchange, L.L.C. for Designation
as a Contract Market in U.S. Treasury Note and U.S. Treasury Bond
Futures Contracts
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of availability of the terms and conditions of proposed
commodity futures contracts.
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SUMMARY: BrokerTec Futures Exchange, L.L.C. (``BTEX'' or ``Exchange'')
has applied for designation as a contract market for the automated
trading of futures contracts on short-term U.S. Treasury Notes (2
Year), medium-term U.S. Treasury Notes (5 Year), long-term U.S.
Treasury Notes (6\1/2\-10 Year), and U.S. Treasury Bonds (15-30 Year)
on an electronic trading system, the BrokerTec Execution Capability
(``BTEC'') trading system.
The Exchange has not previously been approved by the Commodity
Futures Trading Commission (``Commission'') as a contract market in any
commodity. Accordingly, in addition to the terms and conditions of the
four proposed futures contracts, BTEX has submitted to the Commission a
proposed trade-matching algorithm; proposed bylaws and rules pertaining
to BTEX membership, governance, trading standards and disciplinary and
arbitration procedures; and various other materials to meet the
requirements for a board of trade seeking initial designation as a
contract market. BTEX's submission also includes various proposed
bylaws and rules of the BrokerTec Clearing Company, L.L.C. (``BCC''),
an affiliate that would be responsible for clearing and settlement
functions for the Exchange.
Acting pursuant to the authority delegated by Commission Regulation
140.96, the Division of Economic Analysis and the Division of Trading
and Markets have determined to publish the Exchange's proposal for
public comment. The Divisions believe that publication of the proposal
for comment at this time is in the public interest, will assist the
Commission in considering the views of interested persons, and is
consistent with the Commodity Exchange Act. The Divisions seek comment
regarding all aspects of BTEX's application and addressing any issues
commenters believe the Commission should consider.
DATES: Comments must be received on or before July 10, 2000.
[[Page 36668]]
FOR FURTHER INFORMATION CONTACT: With respect to questions about the
terms and conditions of BTEX's proposed futures contracts, please
contact Michael A. Penick, Industry Economist, Division of Economic
Analysis, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW, Washington, Dc 20581: telephone number (202) 418-
5279; facsimile number (202) 418-5527; or electronic mail:
[email protected]. With respect to BTEX's and BCC's other proposed
rules, please contact Duane C. Andresen, Special Counsel, Division of
Trading and Markets, at the same address; telephone number: (202) 418-
5492; facsimile number (202) 418-5536; or electronic mail:
[email protected].
SUPPLEMENTARY INFORMATION:
I. Description of Proposal
By letter dated and received May 8, 2000, BTEX, an affiliate of
BrokerTec Global, L.L.C. (``BrokerTec''), which includes 12 of the
world's largest debt and capital markets dealers as its
shareholders,\1\ has applied to the Commission for designation as a
contact market for electronic trading of futures contracts on short-
term U.S. Treasury Notes (2 Year), medium-term U.S. treasury Notes (5
Year), long-term U.S. Treasury Notes (6\1/2\-10 Year), and U.S.
Treasury Bonds (15-30 Year). The Exchange has not previously been
approved as a contract market in any commodity. Thus, in addition to
the terms and conditions of the four proposed futures contracts, BTEX
has submitted, among other things, a proposed trade-matching algorithm
and proposed bylaws and rules pertaining to BTEX membership rights and
obligations, governance, trading standards and disciplinary and
arbitration procedures. BTEX's submission also includes various
proposed BCC bylaws and rules.
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\1\ Included as shareholders are the following: ABN AMRO Bank
N.V., Banco Santander Central Hispano, S.A., Barclays Electronic
Commerce Holdings, Inc., Credit Suisse First Boston, Inc., DB U.S.
Financial Markets Holding Corporation, Dresdner Bank, AG, The
Goldman Sachs Group, Inc., LB I Group, Inc., Merrill Lynch L.P.
Holdings Inc., Morgan Stanley Dean Witter & Co., Salomon Brothers
Holding Company Inc., and UBS (USA) Inc. BrokerTec's operating
subsidiaries are headquartered in Jersey City, New Jersey, and
London.
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BTEX is organized as a Delaware limited liability company with
three classes of shares. Class A shares would be held by BrokerTec or
an affiliate thereof, and possibly other entities with whom BrokerTec
may become associated.\2\ Class B shares would be held by BTEX clearing
members in proportion to their contributions to the BCC Guaranty Fund,
thereby providing them with the ability to participate in the
governance of BTEX in proportion to the amount of capital they would
have at risk in connection with trading at BTEX. Class C shares would
be held by BTEX members who were on non-clearing members. Once
operational, the Exchange would be governed by a Board of Directors
(``Board''), which would include one Class A Director, ten Class B
directors, one Class C Director, and three public Directors, chosen by
the Board. At its annual meeting, the Board would appoint a chairman of
the Board, President, Secretary, and Treasurer, and could appoint one
or more Vice Presidents, Assistant Secretaries, Assistant Treasurers,
and such other officers as may be required.\3\ The President would be
the chief executive officer of the Exchange. BCC would similarly be
governed by a Board of Directors that would, among other things,
appoint a President as chief executive officer of the company.\4\
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\2\ Only the holders of Class A shares would be entitled to
receive any dividends or distributions that may be declared or paid
by the Exchange, including upon liquidation.
\3\ Other Board responsibilities would include, among others,
setting executive compensation, imposing dues or other charges upon
Class B and Class C members of the Exchange, imposing or reducing
fees or charges for contracts effected on or subject to the
Exchange's rules, and appointing the following committees:
Adjudication, Appeals, Arbitration, Business Conduct, Membership,
Nominating, and trade Review. Certain specified actions relating to
corporate and business matters, such as mergers or acquisitions,
joint ventures or similar arrangements, and eligibility standards
for membership, may be taken by a majority of the Class A Directors,
regardless of the votes of other members of the Board, and may not
be taken without the concurrence of a majority of the Class A
Directors. Certain other specified matters, including appointment of
a chief executive officer and any action to approve or modify the
Exchange's budget, may be taken only with the concurrence of a
majority of the Class A Directors.
\4\ BBC is organized as a Delaware limited liability company
with two classes shares. Class A shares would be held by BrokerTec
or an affiliate thereof, and possibly other entities with whom
BrokerTec may become associated. Class B shares would be held by BCC
members in proportion to their contributions to the BCC Guaranty
Fund, thereby providing them with the ability to participate in the
governance of BCC in proportion to the amount of capital they would
have at risk in the BTEX market. Once operational, BCC would be
governed by a Board of Directors comprised of one Class A Director
and eight Class B Directors. Dividends or other distributions that
may be declared or approved by BCC's Board of Directors would be
payable as follows: 75 percent to holders of Class A stock and 25
percent to holders of Class B stock. Certain specified actions
relating to corporate and business matters, such as mergers,
consolidations, joint ventures, alliances or similar arrangements,
and the creation of any new class of members, may be taken by a
majority of the Class A Directors, regardless of the votes of other
members of the Board of Directors, and may not be taken without the
concurrence of a majority of the Class A Directors. Certain other
specified matters, including any action to dissolve, liquidate or
wind up BCC, appointment of the President, and any action to approve
or modify BCC's budget, may be taken only with the concurrence of a
majority of the Class A Directors.
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Eligibility requirements for BTEX membership would include
demonstration of operational capabilities deemed appropriate by the
Exchange in light of the applicant's anticipated type and level of
trading activity. A non-clearing member would be required to make a
security deposit, purchase one share of Class C stock, and file an
agreement under which a clearing member would agree to accept for
clearing any transactions effected by the non-clearing member which
were not accepted for clearing by any other clearing member. Any
Exchange member could become a clearing member, provided that it met
certain net capital and other specified requirements, including
operational capacity. A clearing member would be required to purchase a
number of Class B shares that is approximately the same proportion of
the total number of outstanding shares of Class B stock as the amount
required to be deposited by the clearing member into BCC's Guaranty
Fund bears to the total amount required to be on deposit in the
Guaranty Fund.\5\ Each member would be responsible for diligently
supervising all activities of its employees relating to transactions
affected on the Exchange or subject to its rules, including those
employees who have access to BTEC (``Authorized Traders''). Each member
would also be required to establish a working connection with BTEC and
be responsible for training and testing its employees with respect to
BTEX rules and the proper use of BTEC and of any terminal or other
device used for obtaining access thereto.
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\5\ Required deposits would be determined in accordance with a
formula based on cleared volume and open interest over the previous
six months.
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BTEX contracts would trade over BTEC, an electronic trading system
that will be based on a customization of the OM CLICK Exchange System.
The OM CLICK Exchange System, provided by OM Technology AB (``OM''), is
used by more than ten exchanges worldwide. BTEC will also be based on
the BrokerTec fixed income cash market trading system that has been
developed by OM and is scheduled to commence operations in June 2000.
OM would operate BTEC and provide facilities management and ongoing
technical and other support.\6\
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\6\ OM and BrokerTec have executed numerous agreements governing
the design, development, and implementation of the BrokerTec trading
platform, proprietary network, and facilities management support.
The parties are currently completing definitive documentation
governing the complete OM-BrokerTec relationship.
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[[Page 36669]]
Under the proposal, orders could be entered into BTEC only by or
through BTEX members, who would be responsible for all orders placed
through them.\7\ BTEC would accept orders for outright trades and
calendar spreads.\8\ Orders entered would be required to include user
identity (including member identity), series (listed contract month),
bid or ask, price, quantity, validity time,\9\ and account or client.
Except for bunched orders, each customer order entered into BTEC would
be for one account.
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\7\ Customers of members may be able to place orders through
automated order routing systems, but all such orders would have to
pass through a server or other connection of an Exchange member.
\8\ Other types of combination trades may be introduced at a
later date.
\9\ The validity time rules for an order would require that the
order be one of the following: good until cancelled (expiration);
good up to a specified number of trading days (maximum of 255 days);
or good until the end of the trading day.
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BTEC would accept the entry of limit orders \10\ and market
orders.\11\ These orders would be executed pursuant to a trade-matching
algorithm that would give first priority to orders at the best prices,
and then give priority among orders at the same price based upon time
of entry into BTEC.\12\ Upon execution of transaction, transaction data
would be automatically transmitted to the BCC for clearing. Trade data
and bids and offers would also be provided to members through BTEC.\13\
Once executed, a member may cancel an erroneous transaction only if,
among other things, the price of the transaction is outside the Board-
specified No-Cancellation Range and the member advises the Exchange of
the error within 10 minutes after the transaction was confirmed.
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\10\ A limit order could be any of the following: (1) ``fill or
kill,'' an order to be filled for the entire quantity against
opposite orders open in BTEC or to be automatically canceled; (2)
``fill and kill,'' an order to be executed to the extent there are
opposite orders open in BTEC, with any balance of the order to be
automatically canceled; and (3) ``fill and store,'' an order to be
executed to the extent there are opposite orders open in BTEC, with
any balance of the order to remain an open order until it expires,
is executed, or is canceled.
\11\ A market order may be either ``fill or kill'' or ``fill and
kill.''
\12\ Subject to this sequence, orders for combination trades
would be executed and the legs thereof would be priced pursuant to
an algorithm that gives priority to execution of each leg of the
transaction as a separate transaction rather than to execution of
the transaction at a differential, if the legs of the transaction
are better than, or equal to, the differential price.
\13\ BTEX represents that it intends to make the trade data
available on a commercial basis to trade dissemination vendors.
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BTEX also would permit block trades, exchanges of futures for
physicals (``EFP''), and exchanges of futures for swaps (``EFS'').
Specifically, BTEX would allow a block trade to be effected between a
member's customers, between the member and a customer, and between the
member and any other member (acting for itself or its customers),
subject to the parties meeting certain specified requirements. The
minimum lot size for a block trade would be 250 lots, and the period
within which the block trade would be required to be reported to the
Exchange would vary, depending upon the size of the trade, i.e., larger
block trades would be reported within longer intervals than smaller
block trades. BTEX would impose no parameters on the price at which the
block trade could be executed.\14\
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\14\ BTEX's rules permit the Board to establish a market-maker
program whereby members or their affiliates may be designated as
market makers and may be granted benefits in return for assuming
obligations in order to provide liquidity and orderliness in an
Exchange market. Benefits accruing to market makers could include,
among others, access to information regarding standing orders in
BTEC, priority in the execution of transactions effected in the
capacity of market maker, reduced transaction fees, and receipt of
compensatory payments. The Board may also restrict the right to
effect block trades only to members which are market makers.
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A member would be able to effect an EFP at any price as may be
mutually agreed upon by the parties to the transaction without entering
the transaction into BTEC. The commodity being exchanged would be
required to have a high degree of price correlation to the underlying
commodity for the futures contract such that the futures contract would
serve as an appropriate hedge for such commodity. A member would
similarly be able to effect an EFS at any price as may be mutually
agreed upon by the parties to the transaction without entering the
transaction into BTEC. The fluctuations in the value of the swap would
be required to have a high degree of correlation to fluctuations in the
price of the underlying commodity for the futures contract being
exchanged such that the futures contract would serve as an appropriate
hedge for such swap. Block trades, EFPs, and EFSs would be submitted to
the BCC for clearing at the time they are reported to the Exchange.
BCC would have its own financial resources (including a Guaranty
Fund), market protection mechanisms, risk management staff, and
internal controls in place in order to monitor risk exposure and
maintain the financial integrity of BTEX and BCC. The amount that would
be deposited and maintained in the Guaranty Fund by each clearing
member would be equal to that member's proportionate percentage of
volume and open interest. BCC would also have the ability to impose
assessments on nondefaulting clearing members to meet a shortfall
caused by the default of another clearing member, subject to specified
limitations. BCC would secure an outside party to provide certain
processing services with respect to clearing and settlement of BTEX
contracts. Although the details of the duties that would be performed
have not been finalized, any such operation would be conducted
consistent with BCC rules.
BTEX's provisions for compliance and surveillance programs would
include market surveillance, trade practice surveillance, disciplinary
functions, financial surveillance in cases where BTEX is the member
firm's self-regulatory organization, and arbitration. BTEX would secure
an outside party to perform certain trade practice and market
surveillance activities and other functions in support of the BTEX
compliance program. The details of the surveillance techniques to be
applied and the allocation of functions between BTEX and the third
party have not been finalized.\15\
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\15\ The Exchange's proposed disciplinary rules generally follow
the provisions of Part 8 of the Commission Regulations. As
previously noted, the Board would appoint Business Conduct,
Adjudication, and Appeals Committees. Investigations of any
suspected violation of Exchange bylaws or rules would be presented
to the Business Conduct Committee. BTEX rules also would include
summary proceedings, under which the compliance staff could
summarily impose a fine against a member for certain types of
violations.
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II. Request for Comments
Any person interested in submitting written data, views, or
arguments on the proposal to designate BTEX should submit their views
and comments by the specified date to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW, Washington, DC 20581. In addition, comments may be sent by
facsimile transmission to facsimile number (202) 418-5521, or by
electronic mail to [email protected]. The Divisions seek comment on
all aspects to BTEX's application for designation as a new contract
market. Reference should be made to BTEX's application for designation
as a contract market in U.S. Treasury Note and U.S. Treasury Bond
futures contracts. Copies of each contract's proposed terms and
conditions are available for inspection at the Office of the
Secretariat at the above address. Copies also may be obtained through
the Office of the Secretariat at the above address or by telephoning
(202) 418-5100.
[[Page 36670]]
Other materials submitted by BTEX may be available upon request
pursuant to the Freedom of Information Act (5 U.S.C. 552), except to
the extent that they are entitled to confidential treatment pursuant to
17 CFR 145.5 or 145.9. Requests for copies of such materials should be
made to the Freedom of Information, Privacy and Sunshine Act compliance
staff of the Office of the Secretariat at the Commission headquarters
in accordance with 17 CFR 145.7 and 145.8.
Issued in Washington, DC, on June 5, 2000.
Alan L. Seifert,
Deputy Director.
[FR Doc. 00-14523 Filed 6-8-00; 8:45 am]
BILLING CODE 6351-01-M
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