[Federal Register: July 11, 2001 (Volume 66, Number 133)]
[Proposed Rules]
[Page 36218-36223]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr11jy01-29]
=======================================================================
-----------------------------------------------------------------------
COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 41
RIN 3038-AB83
Proposed Regulation To Restrict Dual Trading in Security Futures
Products
AGENCY: Commodity Futures Trading Commission.
ACTION: Proposed regulation.
-----------------------------------------------------------------------
SUMMARY: The Commodity Futures Trading Commission ("Commission") is
proposing Regulation 41.27 that would restrict dual trading by floor
brokers in security futures products. Under the proposed regulation,
the dual trading restriction would affect floor brokers that trade
security futures products through open outcry on the trading floor of a
designated contract market ("DCM") or registered derivatives
transaction execution facility ("DTF"). The regulation would provide
for certain exceptions to the restriction, including provisions for the
correction of errors, customer consent, spread transactions, market
emergencies, and unique or special characteristics of an agreement,
contract, or transaction, or of the DCM or DTF.
DATES: Comments must be received by August 10, 2001.
ADDRESSES: Comments should be sent to the Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st Street, NW., Washington,
DC
[[Page 36219]]
20581, Attention: Office of the Secretariat. Comments may be sent by
facsimile transmission to (202) 418-5521 or, by e-mail to
[email protected]. Reference should be made to "Restriction of Dual
Trading in Security Futures Products by Floor Brokers."
FOR FURTHER INFORMATION CONTACT: Alan L. Seifert, Deputy Director,
Division of Trading and Markets, Rachel Berdansky, Special Counsel, or
Amy Fiordalisi, Attorney, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5260. E-mail: [email protected],
[email protected], [email protected].
SUPPLEMENTARY INFORMATION:
I. Background
On December 15, 2000, Congress approved the Commodity Futures
Modernization Act of 2000 ("CFMA"), which was signed by the President
and became effective on December 21, 2000. Among other things, the
CFMA, which substantially amended the Commodity Exchange Act ("Act"),
establishes two categories of markets subject to Commission regulatory
oversight, DCMs and DTFs.\1\ In addition, Title II of the CFMA repeals
the longstanding ban on single stock futures and directs the Commission
and the Securities and Exchange Commission ("SEC") to implement a
joint regulatory framework for security futures products.
---------------------------------------------------------------------------
\1\ Appendix E of Pub. L. 106-554, 114 Stat. 2763 (2000). Prior
to its recent amendment, the Act referred to "designated contract
markets" as Commission-approved products traded on a board of
trade. The Act, as amended, however, uses the term "designated
contract market" to refer to the approved or licensed market on
which futures contracts and commodity options are traded. Proposed
Regulation 41.27 refers to DCMs in this sense.
---------------------------------------------------------------------------
Section 251(c) of the CFMA amends Section 4j of the Act to require
that the Commission issue regulations to restrict dual trading in
security futures products on DCMs and DTFs. Section 4j(a), as amended,
also provides the Commission with the discretion to permit exceptions
to a dual trading restriction that are necessary to ensure fairness and
orderly trading in security futures product markets.\2\ Section
2(a)(D)(i) of the Act, as amended, sets forth listing standards for
security futures products traded on a DCM or DTF. Section
2(a)(D)(i)(VI) requires that security futures products be subject to
the dual trading restriction of Section 4j of the Act or Section 11(a)
of the Securities Exchange Act of 1934 ("1934 Act") and the
regulations promulgated thereunder, respectively.\3\
---------------------------------------------------------------------------
\2\ Section 4j of the Act, as amended, is different in scope
than its predecessor and the Commission Regulation promulgated
thereunder, Commission Regulation 155.5, which restricted dual
trading in any contract market that exceeded certain volume
thresholds unless an exchange requested, and the Commission granted,
a dual trading exemption. As part of this rulemaking, the Commission
also is proposing to remove Commission Regulation 155.5.
\3\ With certain enumerated exceptions, Section 11(a)(1) of the
1934 Act and SEC Rule 11a-1 make it unlawful for any member of a
national securities exchange to effect any transaction for his or
her own account, the account of an associated person, or an account
with respect to which it or an associated person has discretion.
Section 5f of the Act, as amended by Section 252(a) of the CFMA,
provides that any board of trade that is registered with the SEC as
a national securities exchange or a national securities association,
or is an alternative trading system, shall be considered a DCM in
security futures products, provided that certain enumerated
requirements are satisfied, upon filing a notice with the
Commission. Section 5f(b)(1)(B), however, specifically exempts such
notice-registered entities from Section 4j of the Act. Similarly,
Section 6(g) of the 1934 Act, as amended by Section 202(a) of the
CFMA, provides that any board of trade that has been designated as a
contract market by the Commission or has registered with the
Commission as a DTF, may register with the SEC as a national
securities exchange by filing notice with the SEC, solely for the
purposes of trading security futures products, provided that certain
enumerated requirements are satisfied. DCMs and DTFs that notice
register with the SEC for the purpose of trading security futures
products are exempt from Section 11(a)(1) of the 1934 Act.
---------------------------------------------------------------------------
II. Discussion of Proposed Regulation 41.27
A. "Customer"
Proposed Regulation 41.27 would restrict dual trading of security
futures products in accordance with the statutory mandate of Section
4j(a), as amended by Section 251(c) of the CFMA. Proposed Regulation
41.27(a)(4) would define "customer" to mean an account owner for
which a trade is executed other than an account in which a floor
broker's ownership interest or share of trading profits is ten percent
or more; an account for which a floor broker has discretion; an account
controlled by a person with whom a floor broker has a relationship
through membership in a broker association; a house account for a floor
broker's clearing member; or an account for another member present on
the floor of a DCM or DTF or an account controlled by such other
member.\4\ The Commission requests comment as to whether the accounts
of all clearing members and the accounts of members not present on the
floor of a DCM or DTF should be considered non-customer accounts and
included within proposed Regulation 41.27(a)(4). In this regard,
commenters should consider whether clearing members other than the
floor broker's own clearing member and members not present on the floor
of a DCM or DTF are in a better position to protect themselves against
potential abuse of their orders by floor brokers than other
customers.\5\
---------------------------------------------------------------------------
\4\ Under proposed Regulation 41.27(a)(2), the term "member"
would have the meaning set forth in Section 1a(24) of the Act.
Section 1a(24) defines "member" to mean "an individual,
association, partnership, corporation, or trust * * * owning or
holding membership in, or admitted to membership representation on,
[a designated contract market] or derivatives transaction execution
facility, or having trading privileges on [a designated contract
market] or derivatives transaction execution facility."
\5\ In order to enforce a dual trading restriction, DCMs and
DTFs must be able to identify the source of each trade.
Specifically, DCMs and DTFs must be able to determine whether a
trade is for a customer. The Commission's proposed rulemaking "A
New Regulatory Framework for Trading Facilities, Intermediaries and
Clearing Organizations," 66 FR 14262 (March 9, 2001), did not
reserve Commission Regulation 1.35 with respect to DCMs or DTFs.
Thus, exchanges would no longer be required to identify account
types using customer type indicator ("CTI") codes. Use of CTI
codes, however, would be an effective way for DCMs or DTFs to
monitor compliance with a dual trading restriction.
---------------------------------------------------------------------------
B. "Dual Trading"
Proposed Regulation 41.27(a)(6) would define "dual trading" as
the "execution of customer orders by a floor broker through open
outcry during the same trading session in which the floor broker
executes, directly or indirectly, either through open outcry or through
a trading system that electronically matches bids and offers, a
transaction for the same security futures product on the same
designated contract market or registered derivatives transaction
execution facility for an account" of a non-customer.\6\ For this
purpose, non-customer accounts would include those categories of
accounts set forth in proposed Regulation 41.27(a)(4)(i)-(v).
---------------------------------------------------------------------------
\6\ As noted above, prior to the CFMA, the Act referred to
contract markets as Commission-approved products traded on a board
of trade. The CFMA changes the use of the term "contract market"
to mean a board of trade, rather than a product traded on a board of
trade. The statutory language of Section 4j(b) of the Act, in
contrast to the language of Section 4j(a), inadvertently uses the
term contract market as it was used prior to the CFMA. this results
in an anomaly, which, if read literally, changes the definition of
dual trading in a manner that would restrict activity never
considered to be dual trading by the Congress or the Commission.
---------------------------------------------------------------------------
The Commission's proposed dual trading definition refers to a floor
broker executing "directly or indirectly" a transaction for a non-
customer account. The reference to "indirectly" executing a
transaction is intended to prevent a floor broker from executing a
customer order and during the same trading session initiating and
passing an order for a non-customer account identified in proposed
Regulation 41.27(a)(4)(i)-(v) to another broker for execution.
Under the plain language of Section 4j of the Act, the dual trading
restriction would not apply to a DCM or DTF that trades security
futures products solely
[[Page 36220]]
through a system that electronically matches bids and offers entered
into the system.\7\ Specifically, the dual trading definition found in
Section 4j(b) refers to "floor brokers" who "execute" customer
orders. Traditionally, floor brokers execute customer orders on the
trading floor whereas various registrants as well as unregistered
individuals enter orders into electronic trading systems that then
match orders pursuant to a predetermined algorithm. In this connection,
the definition of "floor broker" found in Section 1a(16) of the Act
contemplates a person "in or surrounding * * * any pit, ring, or post
* * *" on the floor of an exchange and not through a system that
electronically matches bids and offers.\8\
---------------------------------------------------------------------------
\7\ In this connection, on February 24, 2000, the SEC approved
the application of the International Securities Exchange LLC
("ISE"), a fully electronic options market, for registration as a
national securities exchange. As part of the approval process, the
SEC approved an ISE rule that permits an order for a member's
personal account to be matched against a customer order entered by
that member provided that: (1) The customer order is first exposed
to the market for 30 seconds; (2) the member has been bidding or
offering for at least 30-seconds prior to receiving a customer order
that is executable against such bid or offer; or (3) the member
utilized the facility mechanism described in ISE's block trading
rule. The ISE's rules do not otherwise limit the ability of a member
to trade for his or her personal account and for customers. See
Exchange Act Release No. 34-42455 (February 24, 2000), 65 FR 11388
(March 2, 2000).
\8\ Section 1a(16) of the Act defines a floor broker as "as any
person who, in or surrounding any pit, ring, post, or other place
provided by a contract market or derivatives transaction execution
facility for the meeting of persons similarly engaged, shall
purchase or sell for any other person any commodity for future
delivery on or subject to the rules of any contract market or
derivatives transaction execution facility."
---------------------------------------------------------------------------
This application of the dual trading restriction takes into account
that floor brokers who execute customer orders through open outcry have
more control over those orders than customer orders entered into a
system that electronically matches bids and offers. Specifically, a
floor broker holding a customer order for trading through open outcry
not only controls when the bid or offer is exposed to the market, but
also controls the price of execution and whom the order is executed
against. A broker holding a customer order for entry into a system that
electronically matches bids and offers only can control when an order
is entered into the system. An algorithm determines at what price and
against whom the order is executed.\9\
---------------------------------------------------------------------------
\9\ Notably, the Commission has repeatedly made clear that
persons who are employed by registrants and handle non-discretionary
orders on electronic trading systems need not be registered.
Further, discretionary orders on such systems can be handled by
registrants other than a floor broker, such as the associated
persons of a futures commission merchant. See the Commission's rules
for the registration of floor traders, 58 FR 19575, 19576 (April 15,
1993).
---------------------------------------------------------------------------
The Commission recognizes that a DCM or DTF may permit the
simultaneous trading of security futures products through open outcry
on a trading floor and the entry of bids and offers on a system that
electronically matches bids and offers pursuant to a predetermined
algorithm for the same product, "side-by-side trading." Under such
circumstances, proposed Regulation 41.27 only would be implicated if a
floor broker executes a customer order through open outcry on a trading
floor during a trading session. Thus, a floor broker would be permitted
to enter a bid or offer for a particular security futures product for
customer accounts on an electronic trading system and trade the same
product for non-customer accounts through open outcry during the same
trading session. In contrast, a floor broker would be prohibited during
the same trading session from executing a customer order for a
particular security futures product through open outcry and entering a
bid or offer for the same product for a non-customer account listed in
41.27(a)(4)(i)-(v) on an electronic trading system.\10\
---------------------------------------------------------------------------
\10\ The Chicago Mercantile Exchange lists several contracts
that trade side-by-side through open outcry and on the electronic
GLOBEX 2 trading system that differ only with respect to
contract size. For example, the e-mini S&P 500 futures contract that
trades on GLOBEX 2 is one-fifth the size of the S&P 500
futures contract that trades simultaneously through open outcry. If
a DCM or DTF determines to trade side-by-side a particular security
futures product that differs only with respect to contract size, the
Commission would consider the two contracts to be the same contract
for purposes of applying the dual trading restriction.
---------------------------------------------------------------------------
C. Rules Implementing Dual Trading Prohibition
Prior to listing a security futures product for trading on a
trading floor where bids and offers are executed through open outcry, a
DCM or DTF must adopt a rule prohibiting dual trading. Under proposed
Regulation 41.27(c)(1), a DCM must submit such a rule to the Commission
in accordance with proposed Regulation 40.6, along with a written
certification that the rule complies with the Act and the regulations
promulgated thereunder, or must obtain Commission approval of such a
rule pursuant to proposed Regulation 40.5. Under proposed Regulation
41.27(c)(2), a DTF must notify the Commission in accordance with
proposed Regulation 37.7(b) that it has adopted a rule prohibiting dual
trading or obtain Commission approval of such a rule pursuant to
proposed Regulation 37.7(c).
D. Specific Permitted Exceptions to the Dual Trading Prohibition
In proposed Regulation 41.27(d), the Commission implements the
directive of Section 4j(a)(2)(A) and (B) of the Act to permit certain
exceptions to the dual trading prohibition. Proposed Regulation
41.27(d)(1)-(4) provides exceptions for the correction of errors
resulting from the execution of a customer order, to permit a customer
to designate in writing a floor broker to dual trade while executing
orders for the customer's account, to permit a broker who
unsuccessfully attempts to leg into a spread transaction to take the
executed leg into his or her personal account and to offset such
position, and to address market conditions that result in a temporary
emergency. Prior to permitting such exceptions to a dual trading
prohibition, a DCM or DTF would have to adopt a rule permitting the
specific exceptions and submit the rule to the Commission or obtain
Commission approval pursuant to the rule submission procedures of
proposed Regulation 41.27(e)(1) or (2). These procedures are identical
to the procedures under proposed Regulation 41.27(c)(1) and (2) for a
DCM or DTF to submit a rule prohibiting dual trading.
E. Unique or Special Characteristics of an Agreement, Contract, or
Transaction, or of the DCM or DTF
Pursuant to Section 4j(a)(2)(C) of the Act, proposed Regulation
41.27(f) would allow DCMs and DTFs to permit an exception to the dual
trading prohibition to address an agreement, contract, or transaction
that presents a unique or special characteristic, or to address a
unique or special characteristic of the specific DCM or DTF. Any rule
of either a DCM or a DTF permitting such an exception would be required
to be submitted to the Commission for prior approval pursuant to the
procedures set forth in proposed Regulation 40.5. Such a submission
also should include an affirmative demonstration of why an exception is
warranted.
A DCM or DTF rule permitting a dual trading exception based on a
unique or special characteristic of an agreement, contract, or
transaction, or of the DCM or DTF would require prior Commission
approval because standards cannot be established in advance to
articulate what would constitute a unique or special characteristic
deserving of a dual trading exception. Thus, a DCM could not certify as
required by proposed Regulation 40.6 that its rule complies with the
Act and the regulations promulgated thereunder. Similarly,
[[Page 36221]]
although a DTF is not required to provide a rule certification under
the rule submission procedures of proposed Regulation 37.7(b), it is
nevertheless required to comply with the Act and the Commission's
regulations. Therefore, the Commission must evaluate each situation on
its own merits to determine whether the DCM or DTF has demonstrated
satisfactorily a unique or special characteristic of an individual
agreement, contract, or transaction, or of the DCM or DTF warranting a
dual trading exception.
III. Cost-Benefit Analysis
Section 15(a) of the Act, as amended by the CFMA, requires the
Commission to consider the costs and benefits of its action before
issuing a new regulation under the Act. The Commission's understanding
is that Section 15(a) does not require the Commission to quantify the
costs and benefits of a new regulation or to determine whether the
benefits of the proposed regulation outweigh its costs. Rather, Section
15(a) simply requires the Commission to consider the costs and benefits
of its action in light of five broad areas of market and public
concern: Protection of market participants and the public; efficiency,
competitiveness, and financial integrity of futures markets; price
discovery; sound risk management practices; and other public interest
considerations.
Section 4j(a) of the Act, as amended by the CFMA, directs the
Commission to "issue regulations to prohibit the privilege of dual
trading in security futures products on each contract market and
registered derivatives transaction execution facility." Section 4j(a)
also provides the Commission with discretion to provide for limited
exceptions to the dual trading prohibition that are necessary to
"ensure fairness and orderly trading in security futures product
markets." Proposed Regulation 41.27(c) would require DCMs and DTFs
that list security futures products for trading through open outcry on
a trading floor to implement and enforce rules prohibiting dual
trading. In addition, DCMs and DTFs that elect to permit dual trading
subject to any of the exceptions set forth in proposed Regulation
41.27(d) or (f) would be required to enact and enforce rules regarding
the particular exceptions.
Proposed Regulation 41.27 would protect market participants and the
general public while minimizing the impact on security futures product
markets. Specifically, the dual trading restriction would not affect
DCMs or DTFs that trade security futures products only through trading
systems that electronically match bids and offers. As explained above,
this is consistent with the plain language of Section 4j of the Act,
and takes into account that floor brokers who execute customer orders
through open outcry have more control over those orders than customer
orders entered into a system that electronically matches bids and
offers.
Compliance with proposed Regulation 41.27 would impose costs on
DCMs and DTFs with respect to enacting and enforcing rules restricting
dual trading of security futures products traded through open outcry on
a trading floor. The costs of enacting and enforcing rules associated
with proposed Regulation 41.27 are either balanced or outweighed by the
increased protection of market participants and the public. The
Commission's exercise of its discretion in implementing the
Congressional directive to restrict dual trading, as set forth in
Section 4j of the Act, would not increase costs related to efficiency,
competitiveness, and financial integrity of financial markets; price
discovery; or sound risk management practices. After considering these
factors, the Commission has determined to propose Regulation 41.27.
Commenters are invited to submit any data that they might have
quantifying the costs and benefits of the proposed regulation with
their comments.
IV. Related Matters
A. Regulatory Flexibility Act
The Regulatory Flexibility Act ("RFA"), 5 U.S.C. 601 et seq.,
requires federal agencies, in promulgating regulations, to consider the
impact of those regulations on small entities. The regulation adopted
herein would affect DCMs, DTFs, and floor brokers. The Commission
previously has established certain definitions of "small entities" to
be used by the Commission in evaluating the impact of its regulations
on small entities in accordance with the RFA.\11\ In its previous
determinations, the Commission has concluded that contract markets are
not small entities for the purpose of the RFA.\12\ The Commission has
recently proposed that DTFs, for reasons similar to those applicable to
contract markets, are not small entities for purposes of the RFA.\13\
Certain floor brokers would be affected by proposed Regulation 41.27.
Although, the Commission believes that proposed Regulation 41.27 would
not have a significant economic impact on a substantial number of small
entities, the Commission invites comments on this issue.
---------------------------------------------------------------------------
\11\ See 47 FR 18618-21 (Apr. 30, 1982).
\12\ See 47 FR 18618 at 18619 (discussing contract markets).
\13\ See 66 FR 14261, 14268 (Mar. 9, 2001).
---------------------------------------------------------------------------
B. Paperwork Reduction Act of 1995
This proposed Rulemaking contains information collection
requirements within the meaning of the Paperwork Reduction Act of 1995
(44 U.S.C. 3501 et seq.). The Commission has submitted a copy of this
section to the Office of Management and Budget (OMB) for its review in
accordance with 44 U.S.C. 3507 (d) and 5 CFR 1320.11, and has requested
a new number for this collection. Collection of Information: Part 41
Relating to Security Indexes and Security Futures Products, OMB Control
Number 3038-XXXX.
Proposed Regulation 41.27 contains some reporting requirements.
Pursuant to proposed Regulation 41.27(c)(1), prior to listing a
security futures product for trading through open outcry, a DCM would
be required to submit to the Commission a rule prohibiting dual
trading, together with a written certification that the rule complies
with the Act, or obtain Commission approval of such a rule. Pursuant to
proposed Regulation 41.27(c)(2), prior to listing a security futures
product for trading through open outcry, a DTF would be required to
notify the Commission that it had adopted a rule prohibiting dual
trading or obtain Commission approval of such rule. DCMs and DTFs would
have to comply with the same respective procedures prior to adopting a
rule permitting any of the dual trading exceptions set forth in
proposed Regulation 41.27(d)(1)-(4). Under proposed Regulation
41.27(f), a DCM or DTF seeking to permit a dual trading exception based
on a unique or special characteristic of an agreement, contract or
transaction, or of the DCM or DTF, would be required to obtain
Commission approval of any such rule. With respect to recordkeeping
requirements, proposed Regulation 41.27(d)(3) would permit a broker who
unsuccessfully attempts to leg into a spread transaction for a
customer, to take the executed leg into his or her 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
transaction.
The estimated burden of proposed Regulation 41.27 was calculated as
follows:
Estimated number of respondents: 2,446.
Total annual responses: 14,229.
[[Page 36222]]
Estimated average hours per response: .07.
Annual reporting burden: 993 hours.
The Commission has submitted the proposed collection of information
to OMB for approval. Organizations and individuals desiring to submit
comments on the information collection requirements should direct them
to the Office of Information and Regulatory Affairs, Office of
Management and Budget, Room 10202, New Executive Office Building, 725
17th Street, NW., Washington, DC 20503; Attention: Desk Officer for the
Commodity Futures Trading Commission.
The Commission considers comments by the public on this proposed
collection of information in:
Evaluating whether the proposed collection of information is
necessary for the proper performance of the functions of the
Commission, including whether the information will have a practical
use;
Evaluating the accuracy of the Commission's estimate of the burden
of the proposed collection of information, including the validity of
the methodology and assumptions used;
Enhancing the quality, usefulness, and clarity of the information
to be collected; and
Minimizing the burden of collection of information on those who are
to respond, including through the use of appropriate automated
electronic, mechanical, or other technological collection techniques or
other forms of information technology; e.g., permitting electronic
submission of responses.
OMB is required to make a decision concerning the collection of
information contained in this proposed regulation between 30 and 60
days after publication of this document in the Federal Register.
Therefore, a comment to OMB is best assured of having its full effect
if OMB receives it within 30 days of publication. This does not affect
the deadline for the public to comment to the Commission on the
proposed Regulation 41.27.
Copies of the information collection submission to OMB are
available from the Commission Clearance Officer, 1155 21st Street, NW.,
Washington, DC 20581, (202) 418-5160.
List of Subjects in 17 CFR Part 41
Security indexes and security futures products.
Accordingly, for the reasons discussed in the preamble, the
Commodity Futures Trading Commission proposes to amend 17 CFR as
follows:
PART 41--SECURITY FUTURES PRODUCTS
1. The authority citation for Part 41 reads as follows:
Authority: Pub. L. 106-554, 114 Stat. 2763, Secs. 251 and 252.
2. Section 41.27 is be added as follows:
Sec. 41.27 Prohibition of dual trading in security futures products by
floor brokers.
(a) Definitions. For purposes of this section:
(1) Trading session means hours during which a designated contract
market or registered derivatives transaction execution facility is
scheduled to trade continuously during a trading day, as set forth in
its rules, including any related post settlement trading session. A
designated contract market or registered derivatives transaction
execution facility may have more than one trading session during a
trading day.
(2) Member shall have the meaning set forth in Section 1a(24) of
the Act.
(3) Broker association includes two or more designated contract
market or registered derivatives transaction execution facility members
with floor trading privileges of whom at least one is acting as a floor
broker who:
(i) Engage in floor brokerage activity on behalf of the same
employer;
(ii) Have an employer and employee relationship which relates to
floor brokerage activity;
(iii) Share profits and losses associated with their brokerage or
trading activity; or
(iv) Regularly share a deck of orders.
(4) Customer means an account owner for which a trade is executed
other than:
(i) An account in which a floor broker's ownership interest or
share of trading profits is ten percent or more;
(ii) An account for which a floor broker has discretion;
(iii) An account controlled by a person with whom a floor broker
has a relationship through membership in a broker association;
(iv) A house account of the floor broker's clearing member; or
(v) An account for another member present on the floor of a
designated contract market or registered derivatives transaction
execution facility or an account controlled by such other member.
(5) Security futures product shall have the meaning set forth in
Section 1a(32) of the Act.
(6) Dual trading means the execution of customer orders by a floor
broker through open outcry during the same trading session in which the
floor broker executes directly or indirectly, either through open
outcry or through a trading system that electronically matches bids and
offers, a transaction for the same security futures product on the same
designated contract market or registered derivatives transaction
execution facility for an account described in paragraph (a)(4)(i)-(v)
of this section.
(b) Dual Trading Prohibition. No floor broker shall engage in dual
trading in a security futures product on a designated contract market
or registered derivatives transaction execution facility, except as
otherwise provided under paragraphs (d) and (f) of this section.
(c) Rules Prohibiting Dual Trading.--(1) Designated contract
markets. Prior to listing a security futures product for trading on a
trading floor where bids and offers are executed through open outcry, a
designated contract market:
(i) Must submit to the Commission in accordance with Commission
Regulation 40.6, a rule prohibiting dual trading, together with a
written certification that the rule complies with the Act and the
regulations thereunder, including this section; or
(ii) Must obtain Commission approval of such rule pursuant to
Commission Regulation 40.5.
(2) Registered derivatives transaction execution facilities. Prior
to listing a security futures product for trading on a trading floor
where bids and offers are executed through open outcry, a registered
derivative transaction execution facility:
(i) Must notify the Commission in accordance with Commission
Regulation 37.7(b) that it has adopted a rule prohibiting dual trading;
or
(ii) Must obtain Commission approval of such rule pursuant to
Commission Regulation 37.7(c).
(d) Specific Permitted Exceptions. Notwithstanding the
applicability of a dual trading prohibition under paragraph (b) of this
section, dual trading may be permitted on a designated contract market
or a registered derivatives transaction execution facility pursuant to
one or more of the following specific exceptions:
(1) 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 or her personal error account resulting
from that error through open outcry or through a trading system that
electronically matches bids and offers as soon as practicable, but,
except as provided herein, not later than the close of business on the
business day following
[[Page 36223]]
the discovery of error. In the event that a floor broker is unable to
offset the error trade because the daily price fluctuation limit is
reached, a trading halt is imposed by the designated contract market or
registered derivatives transaction execution facility, or an emergency
is declared pursuant to the rules of the designated contract market or
registered derivatives transaction execution facility, the floor broker
must liquidate the position in his or her personal error account
resulting from that error as soon as practicable thereafter.
(2) 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 account. 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.
(3) 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 or her 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.
(4) Market emergencies. To address emergency market conditions
resulting in a temporary emergency action as determined by a designated
contract market or registered derivatives transaction execution
facility.
(e) Rules Permitting Specific Exceptions.--(1) Designated contract
markets. Prior to permitting dual trading under any of the exceptions
provided in paragraph (d)(1)-(4), a designated contract market:
(i) Must submit to the Commission in accordance with Commission
Regulation 40.6, a rule permitting the exception(s), together with a
written certification that the rule complies with the Act and the
regulations thereunder, including this section; or
(ii) Must obtain Commission approval of such rule pursuant to
Commission Regulation 40.5.
(2) Registered derivatives transaction execution facilities. Prior
to permitting dual trading under any of the exceptions provided in
paragraph (d)(1)-(4), a registered derivatives transaction execution
facility:
(i) Must notify the Commission in accordance with Commission
Regulation 37.7(b) that it has adopted a rule permitting the
exception(s); or
(ii) Must obtain Commission approval of such rule pursuant to
Commission Regulation 37.7(c).
(f) Unique or Special Characteristics of Agreements, Contracts, or
Transactions, or of Designated Contract Markets or Registered
Derivatives Transaction Execution Facilities.
Notwithstanding the applicability of a dual trading prohibition
under paragraph (b) of this section, dual trading may be permitted on a
designated contract market or registered derivatives transaction
execution facility to address unique or special characteristics of
agreements, contracts, or transactions, or of the designated contract
market or registered derivatives transaction execution facility as
provided herein. Any rule of a designated contract market or registered
derivatives transaction execution facility that would permit dual
trading when it would otherwise be prohibited, based on a unique or
special characteristic of agreements, contracts, or transactions, or of
the designated contract market or registered derivatives transaction
execution facility must be submitted to the Commission for approval
under the procedures set forth in Commission Regulation 40.5. The rule
submission must include a detailed demonstration of why an exception is
warranted.
PART 155--TRADING STANDARDS
3. Section 155.5 is proposed to be removed and reserved.
Issued in Washington, DC on July 5, 2001, by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 01-17171 Filed 7-10-01; 8:45 am]
BILLING CODE 6351-01-P
�