[Federal Register: May 9, 1997 (Volume 62, Number 90)]
[Rules and Regulations]
[Page 25470-25475]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09my97-10]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Bunched Orders and Account Identification
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of Interpretation and Approval Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'')
hereby is issuing an Interpretation regarding the account
identification requirement of Commission Regulation
[[Page 25471]]
1.35(a-1)(2)(i) as it pertains to the practice of combining orders for
different accounts into a single order for placement and execution,
i.e., ``block'' or ``bunched'' orders. The Commission simultaneously is
issuing an Order approving the National Futures Association (``NFA'')
Interpretive Notice to NFA Compliance Rule 2-10 Relating to the
Allocation of Block Orders for Multiple Accounts (``NFA Notice'').\1\
This Interpretation provides that, with respect to bunched orders,
compliance with the guidance provided in the NFA Notice, incorporated
herein, and with the Commission guidance provided in this
Interpretation, will be deemed by the Commission to be compliance with
the account identification requirement of the above-cited regulation.
The Commission also is providing an opportunity for comment prior to
this Interpretation and Approval Order becoming effective.
\1\ The NFA Notice is published herein as paragraph III to this
Interpretation and Approval Order.
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DATES: This Interpretation and Approval Order, subject to the
Commission's consideration of any comments received, shall become
effective simultaneously on June 9, 1997.
ADDRESSES: Interested person should submit their views and comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st St., 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].
Reference should be made to bunched orders and account identification.
FOR FURTHER INFORMATION CONTACT:
Duane C. Andresen, Special Counsel, Division of Trading and Markets,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
St., NW., Washington, DC 20581. Telephone: (202) 418-5490.
SUPPLEMENTARY INFORMATION:
I. Introduction
This Interpretation sets forth certain account documentation
procedures under which bunched orders may be placed, recorded,
executed, ``given up'' to multiple clearing firms, where applicable,
and allocated to customer accounts, which the Commission will deem as
sufficient to satisfy the account identification requirement of
Regulation 1.35(a-1)(2)(i). By this Approval Order, the Commission,
pursuant to Section 17(j) of the Commodity Exchange Act, is approving
the NFA Notice. The Commission also is setting forth additional
guidance under which bunched orders may be handled, to include
situations where certain of the NFA procedures may not be applicable in
that they do not apply to registrants who are not members of the NFA or
under the supervision of NFA members.\2\
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\2\ The interpretation reflected herein pertains only to bunched
orders as defined in this Interpretation or the NFA Notice. All
other customer orders placed for execution must be documented in
accordance with the express terms of Regulation 1.35(a-1)(2)(1) and
applicable exchange rules.
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The Commission's issuance of this Interpretation and Approval Order
is based on its understanding that (1) commodity trading advisors
(``CTA''), futures commission merchants (``FCM''), introducing brokers
(``IB''), consistent with their responsibilities hereunder, will
maintain documentation sufficient to demonstrate that the procedures
authorized hereby are in fact followed, and (2) affected registrants,
exchanges and the NFA will have effective systems in place that are
used to monitor compliance and that appropriate procedures will be in
place to address apparent noncompliance. In this connection, Commission
staff recently has reviewed relevant audit and compliance procedures at
the NFA and exchanges with respect to account identification for
bunched orders. Commission staff also, on an ongoing basis, has
encouraged the implementation of audit enhancements to address the
types of allocation abuses observed in connection with exchange and
Commission investigations regarding preferential allocation and other
forms of allocation fraud.
In general, as specified herein with respect to bunched orders, the
floor order account identification requirement of Commission Regulation
1.35(a-1)(2)(i) may be met by prefiling the appropriate order
allocation procedures with a registrant clearing or executing the
trades, the NFA or an exchange. That regulation's account
identification requirement also may be met by the contemporaneous
transmission of such allocation instructions with the order to a
registrant clearing or executing the trades, either verbally or,
consistent with the methodology described in the NFA Notice,
electronically. These prefiled procedures or contemporaneous
instructions also must include a methodology to allocate to those
accounts orders that may be filled at multiple prices (``split fills'')
or at less than specified quantities (``partial fills'') and, where
applicable, to allocate give ups to multiple clearing firms, including
a methodology to allocate split and partial fills among those clearing
firms. CTAs, FCMs, IBs, their respective associated persons (``AP''),
and FBs, as applicable, who do not identify the ultimate customer(s)
and appropriate quantity on a floor order must satisfy the standards
set forth in the NFA Notice and the Commission guidance provided herein
to be in compliance with Commission Regulation 1.35(a-1)(2)(i).
Compliance with the express terms of Regulation 1.35(a-1)(2)(i) will
continue to be required in all cases where the procedures referenced in
this Interpretation are not applicable or are not followed.
II. Background
Commission Regulation 1.35(a-1)(1) requires that each FCM and each
IB receiving a customer order immediately prepare a written record of
the order which includes certain account identification. Regulation
1.35(a-1)(2)(i) requires that each member of a contract market who
receives a customer's order on the floor of a contract market that is
not in the form of a written record also immediately prepare a written
record of such order, including certain account identification. Under
that rule, the floor order must include the account number for the
ultimate customer for whom the order is placed or an identifying code
which is directly linked to that specific customer account. This
requirement has existed since Regulation 1.35(a-1)(2) became effective
March 24, 1972.\3\ Since this regulation was adopted, there have been
changes in the manner in which orders are placed, executed and cleared
on the futures markets that reflect changes in the manner of doing
business and in the types of entities using these markets. With the
growth of managed funds business, in which multiple accounts are
advised by one adviser using one or more trading strategies, the
practice of bunching multiple orders for different accounts into a
single order for placement and execution has increased dramatically. In
addition, the unbundling of clearing and execution services has
resulted in the increasingly common use of give up arrangements,
whereby orders are executed by one or more FCMs and given up for
clearing to other FCMs. While the CTA selects the executing FCM, the
CTA's customers may select different FCMs for clearing purposes.
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\3\ 37 FR 3802 (February 23, 1972). Regulation 1.35(a-1)(2) was
amended effective August 30, 1993 and was redesignated as 1.35(a-
1)(2)(i). 58 FR 31162 (June 1, 1993). The requirement to include
customer account identification on the floor order remained
unchanged.
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[[Page 25472]]
Previously, to accommodate these changes in industry practice,
Commission staff interpreted Regulation 1.35(a-1)(2)(i) to permit the
placement and execution of bunched orders provided that the person
placing the bunched order provided at the time of entry a single series
designation that identified all accounts included in the bunched order
and a predetermined allocation formula. That interpretation required
that the allocation formula be provided to the FCM prior to or
contemporaneously with the placement of the bunched order, specify by
account number those accounts to which it would apply, specify the
number of contracts to be allocated to each account, and be designed to
provide fair and equitable treatment of the accounts such that no
account or group of accounts received consistently favorable or
unfavorable treatment. That interpretation of Regulation 1.35(a-
1)(2)(i) consistently has been provided in response to specific
inquiries and, in recognition that written regulatory guidance in this
area may be necessary, was published in the Federal Register as
paragraph (5) of a proposed amendment to Regulation 1.35(a-1).\4\ In
issuing this Interpretation, the Commission expressly is adopting
procedures consistent with the staff interpretation as clarified herein
and withdrawing proposed Regulation 1.35(a-1)(5).
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\4\ 58 FR 26270 (May 3, 1993).
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III. The NFA Notice
The NFA Notice addresses three primary issues: (1) The manner and
timing of the identification of the allocation formula; (2) principles
that govern the allocation of trades; and (3) bunched orders executed
on a give up basis, and reads in full as follows:
NFA Compliance Rule 2-10; Interpretive Notice Relating to the
Allocation of Block Orders for Multiple Accounts
CFTC Regulation 1.35, which NFA Compliance Rule 2-10 adopts by
reference, requires that each FCM receiving a customer order
immediately prepare a written record of the order which includes an
appropriate account identification. NFA Compliance Rule 2-4 requires
CTA Members to provide FCMs with that required information. The
purpose of the regulation is to prevent various forms of customer
abuse, such a fraudulent allocation of trades, by providing an
adequate audit trail which allows customer orders to be tracked at
every step of the order processing system. Since this regulation was
originally adopted, however, there have been dramatic changes in the
way business is done. With the explosive growth of the managed funds
business and the increasing use of ``give-up'' agreements, it is not
at all uncommon for some CTAs to place block orders for hundreds of
accounts on markets around the world, with orders executed by one or
more FCMs and cleared by other FCMs. How the basic requirements of
CFTC Regulation 1.35 apply to block orders for multiple accounts
(``block or bunched order'') has been the source of considerable
difficulty and confusion. While this Notice does not attempt to
address all of the issues which can arise in this context, it does
provide guidance on commonly recurring questions.
With respect to block orders, CFTC Regulation 1.35 has been
interpreted to require that, at or before the time the order is
placed, the FCM must be provided with information which identifies
the accounts included in the block order and which specifies the
number of contracts to be allotted to each account. In most
instances, a CFTA can verbally provide all of that information
contemporaneously with the placement of the order. Some of the time,
however, this is not practical. Verbal transmission of numerous
account numbers and allocation information could result in price
slippage in filling block market orders. Most CTAs can deal with
this problem by pre-filing with the FCM standing instructions which
contain all of the necessary information.
For a limited number of larger and more sophisticated CTAs,
however, pre-filing standing instructions may not be practicable
either. For these CTAs, although their basic allocation methodology
does not change, the specific allocation instructions produced by
the methodology may change on a daily basis. For example, a large
CTA with a dynamic trading program may regularly change its order
size based upon market volatility and historical price data.
Certainly, if a CTA changes its order size, then the precise number
of contracts allocated to each account within the CTA's trading
program will also change. Other factors could cause regular changes
to a CTA's order size and/or allocation breakdowns such as the
number of accounts which open and close and any additions and
withdrawals made in existing accounts. In the above instances,
although the specific application of a CTA's allocation methodology
to the universe of its accounts may cause allocation adjustments,
the allocation methodology itself remains constant. Because the
methodology must meet the standards of this Notice, it must be
designed to provide non-preferential treatment for all accounts.
Though these CTAs could provide the allocation information to their
FCMs in advance of each order, this information could disclose their
trading strategies, which they are obviously reluctant to do.
In general, then, there are two alternatives to the verbal
filing of all account identification data contemporaneously with
order placement:
(1) pre-filing of instructions for identification of accounts
included in block orders and the allocation of executed block orders
to accounts; and
(2) under the stringent requirements described below, the
contemporaneous filing of allocation instructions via electronic
transmission.
This Interpretive Notice clarifies how either approach can be
implemented consistent with the requirements of CFTC Regulation
1.35.
Pre-Filing of Allocation Instructions
Allocation instructions for trades made through block orders for
multiple accounts must deal with two separate issues. The first,
which arises in all such orders, involves the question of how the
total number of contracts should be allocated to the various
accounts included in the block order. The second involves the
allocation of split or partial fills. For example, a CTA may place a
block order of 100 contracts for multiple accounts. In many
instances, however, a market order for 100 contracts may be filled
at a number of different prices. Similarly, if an order is to be
filled at a particular price, the FCM may be able to execute some
but not all of the 100 lot order. In either example, the question
arises of how the different prices or the contracts in the partial
fill should be allocated among the accounts included in the block
order.
The same set of core principles govern the procedures to be used
in handling both of these issues. Any procedure for the general
allocation of trades or the allocation of split and partial fills
must be:
<bullet> Designed to meet the overriding regulatory objective
that allocations are non-preferential, such that no account or group
of accounts receive consistently favorable or unfavorable treatment;
<bullet> Sufficiently objective and specific that the
appropriate allocation for any given trade can be verified in any
audit by NFA, an exchange DSRO, the CFTC or the FCM's and CTA's own
accountant; and
<bullet> Consistently applied by the Member firm.
In performing audits, we have noted that Members employ a wide
variety of methods to allocate split and partial fills, some of
which satisfy the standards stated above and some of which do not.
The following examples of procedures for the allocation of split and
partial fills generally satisfy the standards stated above.
Example #1--Rotation of Accounts
One basic allocation procedure involves a rotation of accounts
on a regular cycle, usually daily or weekly, which receive the most
favorable fills. For example, if a firm has 100 accounts trading a
particular trading program, in the first phase of the cycle, Account
#1 receives the best fill, Account #2 the second best, etc. In phase
2 of the cycle, Account #2 receives the best fill and Account #1
moves to the end of the line and receives the least favorable fill.
Example #2--Random Allocation
Some firms prepare on a daily basis a computer generated random
order of accounts and allocate the best price to the first account
on the list and the worst to the last. This method would satisfy the
standards stated above.
Example #3--Highest Prices to the Highest Account Numbers
Some firms rank accounts in order of their account numbers and
then allocate the highest fill prices to the accounts with the
[[Page 25473]]
highest account numbers. Any advantage the higher numbered accounts
enjoy on the sell order are theoretically offset by the disadvantage
on the buy orders. Although under certain market conditions this may
not always be true, the method generally complies with the
standards.
Example #4--Average Price and Quantity
With regard to split and partial fills, allocations made
pursuant to exchange rules which provide for the allocation of
average prices and quantities in block orders for multiple accounts
would, of course, be acceptable. In addition, certain firms may have
internal programs which calculate the average price for each block
order and allocate the actual fill prices among the accounts
included in the order to approximate, as closely as possible, the
average fill price. These internal programs must specifically
satisfy the standards stated above and be documented by the Member
firm.
Though the examples cited above are the ones NFA most commonly
sees in audits, others may offer comparable treatment. We would also
note that the appropriateness of any particular method for
allocating split and partial fills depends on the CTA's overall
trading approach. For example, a daily rotation of accounts may
satisfy the general standards for CTAs who trade on a daily basis
but inappropriate for CTAs who trade less frequently. In addition,
certain variations of these basic methods would not satisfy those
requirements. For example, it would not be acceptable for the CTA to
deviate from the regular rotation to accommodate an account whose
performance is lagging behind others in the same program. This would
inject the CTA's subjective judgment into the process, would render
the allocation impossible to duplicate in the audit process and
would open the potential for customer abuse.
One related issue which has generated some confusion is whether
the responsibility for the allocation of split and partial fills
rests with the CTA or with the FCM. The CTA certainly has the sole
responsibility for ensuring that the procedures are appropriate in
light of its approach to trading. With respect to the actual
implementation of the procedures, since the CTA is directing the
trading in the accounts, the responsibility for allocating split and
partial fills among the accounts should rest with the CTA. However,
there is nothing under NFA rules to preclude an FCM from agreeing to
undertake this responsibility, whether it clears or executes the
trades, pursuant to either its own procedures or to those supplied
by the CTA. Any division of responsibilities agreed to by the FCM
and CTA should be clearly documented.
There is also good deal of confusion on how the basic principles
of CFTC Regulation 1.35 apply to block orders executed on a ``give-
up'' basis, a process which was essentially unknown when Regulation
1.35 was originally adopted. Subject to exchange rules, in any given
block order there may be multiple executing FCMs, multiple clearing
FCMs or multiple FCMs serving each of these functions. The exact
form of customer identification which the FCM must receive from the
CTA under Regulation 1.35 may vary depending on the FCM's role in
filling the order. Essentially, each FCM must receive sufficient
information to allow it to perform its function. For executing FCMs,
this includes, at a minimum, the number of contracts to be given up
to each clearing FCM and instructions for allocation of split and
partial fills among these FCMs. Information concerning the number of
contracts to be allocated to each account included in the block
order must be provided to the FCM which will carry out those
instructions, which, in most cases, will be the FCM clearing the
accounts. All of this information must be provided at or before the
time the order is placed and could be provided by pre-filing a set
of instructions. If the pre-filed instructions for the general
allocation or the allocation of split and partial fills meet the
standards set forth in this Notice, then the clerical task of
implementing the instructions could be performed by either the FCM
or the CTA.
If that clerical function is performed by the CTA, this does not
suggest that the FCM is relieved of any further responsibility. The
FCM has certain basic duties to its customers, including the duty to
supervise its own activities in a way designed to ensure that it
treats its customers fairly. Specifically, the FCM would violate
this duty if it has actual or constructive notice that allocations
for its customers may be fraudulent and fails to take appropriate
action. The FCM with such notice must make a reasonable inquiry into
the matter and, if appropriate, refer the matter to the proper
regulatory authorities (e.g., the CFTC or the NFA or its DSRO).
Obviously, whether an FCM has such notice depends upon the
information that the FCM has or should have, which, in turn, is
based upon the FCM's role in the executing and clearing process. For
example, an FCM that both executes and clears an entire block order
will possess more information than an FCM that executives or clears
only a portion of an order. In order to fulfill its duties, and FCM
at any level of the process should implement appropriate compliance
measures. For example, an FCM may choose to spot check the
allocations made to its customer accounts for conformity with the
prefiled instructions it has received from the CTA and/or review the
performance of accounts being traded pursuant to the same trading
program.
Contemporaneous Filing of Instructions Via Electronic Transmission
Instructions for the allocation of contracts to accounts
included in a block order can also be given at the time the CTA
places the trade. NFA notes, however, that as a general rule
allocation procedures for split and partial fills should be pre-
filed with the appropriate FCM. For instructions on the number of
contracts to be assigned to each account in the block order, many
CTA's simply provide the necessary allocation information by phone
when they call in the block order. For certain CTAs, however,
providing allocation instructions verbally when the block order is
placed may not be a practicable option. These CTAs may have hundreds
of accounts included in the block order and providing detailed
allocation information by phone may be extremely time consuming.
Delaying the execution of the order while that process drags on
might ultimately harm customers through market price slippage. For
most of these CTAs, the prefiling of instructions provides an
adequate alternative. However, for a limited number of CTAs, it may
not be practicable to pre-file with the FCM a standing set of
allocation instructions. The trading programs used by these CTAs are
complex and dynamic. Given the fine tuning adjustments that are made
on a daily basis, the exact number of contracts these CTAs allocate
to any given account may vary from one day to the next, and may make
the prefiling of instructions impracticable.
Under these circumstances, one way the CTA may provide the
account identification information required under CFTC Regulation
1.35 would be to send the FCM, by facsimile or other form of
electronic transmission, the breakdown of contracts to be assigned
to each account included in the block order. The CTA would have to
begin to send that information at the time the order is placed.
Given the possibility of busy signals, paper jams and other
limitations of electronic transmissions, there may be momentary
delays in the completion of the transmission. Such delays should be
neither commonplace nor lengthy, and the CTA should maintain
appropriate documentation whenever such delays occur. When those
delays do occur, however, CFTC Regulation 1.35 does not necessarily
require the FCM to delay execution of the order until the electronic
transmission of the allocation information is completed. To avoid
delays in execution due to such transmission difficulties, the CTA
must have provided the FCM with a written certification that:
(1) the CTA will begin the transmission to the FCM of the
allocation breakdown contemporaneously with the placement of the
order and will maintain appropriate documentation regarding any
delays experienced in such transmission;
(2) prior to the placement of an order, the CTA has also
generated a non-preferential allocation breakdown for each order
which has been computer time-stamped indicating the date on which
the order is to be placed and the date and time the allocation
breakdown was printed;
(3) the CTA maintains with either their executing or clearing
FCMs a complete list of all accounts traded by the CTA, by trading
program if applicable;
(4) if a bunched order does not include all accounts within a
particular trading program, then prior to the execution of the order
these CTAs will identify for their FCMs the accounts which are
included, by account identifier or designation;
(5) on a daily basis, these CTAs confirm that all their accounts
have the correct allocation of contracts; and
(6) at least once a month, these CTAs analyze each trading
program to ensure that the allocation method has been fair and
equitable. If divergent performance results exist over time, then
such results must be shown to be attributable to factors other than
[[Page 25474]]
the CTA's trade allocation or execution procedures. Additionally, a
CTA must document its internal audit procedures and the results of
its monthly analysis and maintain these audit procedures and results
as firm records subject to review during an NFA audit.
An FCM which relies in good faith on the above certification
would be deemed to be in compliance with CFTC Regulation 1.35. The
CTA must also file a copy of that certification with NFA at least
thirty days prior to implementing these procedures. This time period
will provide NFA with an opportunity to review and verify the
information contained in the certification.
For most block orders, the pre-filing of allocation instructions
is the most practicable and preferred course of action. The
procedure described herein relating to the contemporaneous filing of
instructions via electronic transmission is an alternative available
to those relatively few CTAs that can demonstrate a need for this
alternative and meet the requirements of the certification. Each CTA
availing itself of this alternative must not only adhere to the
requirements of this Notice, but also demonstrate on a continuing
basis to the appropriate regulator or self-regulator both its need
to use this alternative and that the information in the
certification is correct. If a CTA utilizes this alternative, it
must adhere to this Notice's requirements or may face disciplinary
action for its failure to do so. If any Member has questions
concerning how this Interpretive Notice would apply to its
operations, please contact NFA's Compliance Department.
IV. Commission Guidance
In any instance in which a CTA bunches multiple orders for
different accounts into a single order for placement and execution, the
antifraud provisions of Sections 4b and 4o of the Commodity Exchange
Act may be violated if the resulting allocation is not fair, equitable
and consistent in its treatment of the accounts included in the order.
A CTA may bunch orders and provide, at the time of order placement with
an executing registrant,\5\ an allocation designator, as defined
herein, that the Commission will find to constitute compliance with the
account identification requirement of Regulation 1.35(a-1)(2)(i) for
the accounts included in the order, by the CTA or the executing
registrant, respectively, provided that, consistent with the NFA Notice
and the following:
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\5\ ``Executing registrant'' refers to the registrant with whom
the CTA places the bunched order for execution, and may be either an
FCM or a floor broker.
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1. The CTA provides to each carrying FCM to which fills are to be
allocated, either by prefiling allocation procedures or (consistent
with the guidance set forth in the NFA Notice) contemporaneously
providing allocation instructions with the placement of the order, a
methodology to allocate contracts to customer accounts that identifies
the ultimate customer account numbers and includes procedures for
allocating prices and quantities for split and partial fills to those
customers;
2. The order pertains to a group of specified accounts previously
or contemporaneously identified to the carrying firm(s); and
3. The order is intended to provide fills for all accounts included
in a single trading program.
4. The executing registrant documents the order as follows:
a. For purposes of the documentation required pursuant to this
paragraph 4., an allocation designator means a symbol which represents
all or any portion of the following information not reflected on the
floor order as may be necessary to identify the ultimate customers,
quantities and prices: that is, the trading program and the allocation
procedures or methodology, including procedures for allocating prices
and quantities for split and partial fills among carrying firms and/or
among ultimate customers.
b. If the bunched order is to be allocated to customer accounts at
one carrying FCM, prior to the time the order is executed, the floor
order must reflect (1) the carrying FCM, (2) the order quantity, and
(3) an allocation designator.
c. If the bunched order is to be given up for allocation to
customer accounts at more than one carrying FCM, prior to the time the
order is executed, the floor order must reflect (1) each carrying FCM,
(2) the quantity to be given up to each such FCM, and (3) an allocation
designator.\6\ Consistent with the guidance provided in the NFA Notice,
allocation instructions may be provided by electronic transmission to
the executing registrant contemporaneously with order placement.
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\6\ If the allocation instructions are provided
contemporaneously with order placement to a floor trading desk or
floor broker's clerk, the person receiving the order may immediately
transmit the order's terms (that is, contract, quantity and price)
to the executing broker, either by hand signals, verbal or written
communication, while continuing to record the allocation information
on the floor order. Order execution need not be delayed while such
information is being recorded.
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d. Alternatively, if the bunched order is to be given up for
allocation to customer accounts at more than one FCM and the CTA has
prefiled, consistent with exchange rules,\7\--with the NFA, a
designated clearing member, an executing registrant, or an exchange--a
set of allocation procedures which (1) Identifies each FCM to which
trades will be given up, (2) identifies a methodology to determine how
many contracts each FCM would receive, and (3) identifies an allocation
designator, prior to the time the order is executed, the floor order
must reflect the order quantity and the allocation designator
identifying the prefiled procedures.
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\7\ Any exchange which permits the prefiling of procedures with
the NFA or an exchange pursuant to this interpretation of Regulation
1.35(a-1)(2)(i) must have procedures in place for their executing
members to confirm that CTA allocation procedures, including
designators, are in fact prefiled.
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e. Prefiled procedures ordinarily would be standing procedures that
would remain unchanged for a reasonable period of time.
5. Any time a CTA prefiles allocation procedures as provided herein
and the CTA, rather than the executing or clearing registrant, provides
specific allocations, after the execution of an order, implementing
those prefiled procedures, the CTA must provide those allocations as
soon as practicable.
Consistent with the NFA Notice, if an executing registrant has
notice, based upon the information available to that registrant, that
(1) allocation procedures are not prefiled, (2) the CTA's instructions
do not conform to the prefiled procedures of (3) the give up and/or
split and partial fill procedures or instructions result in allocations
that are not being made in a fair, equitable and consistent manner,
either by quantity or price, the executing registrant must make
reasonable inquiry into the matter and, if appropriate, refer the
matter to the proper regulatory authorities.
V. Conclusion
Based on the foregoing, FCMs, IBs, CTAs, their respective APs, and
FBs who handle bunched orders for multiple accounts shall be deemed to
be in compliance with the account identification requirement of
Commission Regulation 1.35(a-1)(2)(i) if such orders are placed,
recorded, executed, given up to multiple clearing firms, if applicable,
and allocated to customer accounts in accordance with the provisions
set forth in the NFA Notice and in compliance with the above-stated
Commission guidance.
This Interpretation and Approval Order is based upon the
Commission's understanding that (1) affected registrants, consistent
with their responsibilities as set forth herein, will maintain
documentation sufficient to demonstrate that the procedures thus
authorized are in fact followed and (2) affected registrants, exchanges
and the NFA will have effective systems in place to monitor compliance
and to address apparent noncompliance with
[[Page 25475]]
the terms hereof. The Commission intends to monitor the procedures and
practices followed pursuant hereto, including through review of the
results of audits of registrants handling bunched orders. Based
thereon, the Commission may provide further guidance as appropriate.
Dated: May 5, 1997.
By the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 97-12161 Filed 5-8-97; 8:45 am]
BILLING CODE 6351-01-M
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