[Federal Register: November 24, 1997 (Volume 62, Number 226)]
[Notices]
[Page 62566-62568]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr24no97-33]

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COMMODITY FUTURES TRADING COMMISSION


Application of FutureCom, LTD. as a Contract Market in Live
Cattle Futures and Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of application.

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SUMMARY: FutureCom has applied for designation as a contract market for
the automated internet-based trading of cash-settled live cattle
futures and options. FutureCom has not previously been approved by the
Commission as a contract market in any commodity, thus, in addition to
the terms and conditions of the proposed futures and options contracts,
FutureCom has also submitted proposed trading rules, rules of
government, and other materials to meet the requirements for a board of
trade seeking initial designation as a contract market. Notice of
FutureCom's application was previously published for public comment on
January 31, 1997 (62 FR 4730). Many comments received in response to
that notice expressed the opinion that there were insufficient
materials and information available concerning the applicant, thus
commenters were unable to respond adequately to the request for
comment. Since the initial publication, the Commission has received
additional materials and information in support of the application.
Acting pursuant to the authority delegated by Commission Regulation
140.96, the Division of Trading and Markets (``Division'') has
determined to again publish the proposal for public comment. The
Division believes 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

[[Page 62567]]

with the purposes of the Commodity Exchange Act. The Division seeks
comment regarding all aspects of FutureCom's application and addressing
any issues commenters believe the Commission should consider.

DATES: Comments must be received on or before December 24, 1997.

FOR FURTHER INFORMATION CONTACT: With respect questions about the terms
and conditions of the proposed futures and option contracts, please
contact Fred Linse of the Division of Economic Analysis, Commodity
Futures Trading Commission, at Three Lafayette Centre, 21st Street NW,
Washington, DC 20581; Telephone: (202) 418-5273; Facsimile number:
(202) 418-5527; or Electronic mail: [email protected]. With respect to
questions about the trading rules and rules of government, please
contact Lois Gregory, Division of Trading and Markets, at the same
address; Telephone: (202) 418-5483; Facsimile number: (202) 418-5536;
or Electronic mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

    FutureCom, LTD., a limited Texas partnership, has applied for
designation as a contract market for the automated trading over the
internet of cash-settled live cattle futures and options. FutureCom has
not been approved previously by the Commission as a contract market in
any commodity, thus, in addition to the terms and conditions of the
proposed futures and options contracts, FutureCom has also submitted
proposed trading rules, rules of government, surveillance and
compliance procedures, system security documentation, and other
materials and documents to meet the requirements for a board of trade
seeking initial designation as a contract market.
    Notice of FutureCom's application was previously published for
public comment on January 31, 1997 (62 FR 4730). Many comments received
in response to that notice expressed the opinion that there were
insufficient materials and information concerning the applicant
available at that time, thus commenters were unable to respond
adequately to the request for comment. By letter dated June 20, 1997,
the Division informed FutureCom that the running of the one-year review
period provided in Section 6 of the Commodity Exchange Act would be
stayed with respect to both the proposed futures and the proposed
option contract until the Commission received information which fully
addressed several major subject areas outlined in the letter. Since the
initial publication, the Commission has received a considerable amount
of additional material and information in support of the application.
Based on the adequacy of the information contained in the submissions
received to date, the Division has determined to lift the stay of the
one-year review period and to publish again the proposal for public
comment. The Division believes that publication of the proposal for
comment again at this time is in the public interest, will assist the
Commission in considering the views of interested persons, and is
consistent with the purposes of the Commodity Exchange Act.
    FutureCom's affairs are managed under the direction of its Board of
Directors and it will operate on a for-profit basis. FutureCom has
proposed Bylaw provisions intended to meet requirements of various
Commission regulations concerning the composition of governing boards
and disciplinary committees. The FutureCom Board has the authority to
establish classifications of membership and the qualifications that an
applicant for membership must meet.
    Each FutureCom member would have to maintain minimum net worth
requirements applicable to the member's FutureCom membership
classification. Every member would be a clearing member of the
Exchange. Any member not in compliance with minimum financial
requirements would not be able to engage in transactions except to
close out positions.
    FutureCom's proposed Bylaws also address trading standards,
clearing and settlement, disciplinary proceedings, and arbitration.
Trades would be matched in accordance with a trade matching algorithm
based on a price-time priority. Traders could enter four types of
orders: market, limit, stop, and market-if-touched. The trading
standards would require each member to maintain records in accordance
with Commission regulations. Bylaws would govern exchange of futures
for physicals and position limits. Position limits would vary by
trading level assigned to each member. Trading levels would be assigned
based upon FutureCom's analysis of the credit risks associated with
each applicant.
    Each member would enter into an account and clearing agreement with
FutureCom which would set forth, among other things, the details of the
clearing arrangement, initial margin, margin calls, default,
liquidation, trading and clearing fees, and order entry. All orders
entered into the FutureCom system would be cleared and settled
immediately upon execution through the First National Bank of Amarillo
(the ``Clearing Bank'') via a system of automatic electronic debits and
credits among traders' accounts. FutureCom and the Clearing Bank have
entered into a cash settlement procedures agreement and a custody
agreement. Initial margin for any order would have to be on deposit
with the Bank before any transaction was executed. Maintenance margin
notices would be sent by electronic mail and would specify the date,
time and amount due and members would be responsible for receiving and
assuring that funds were available to fund an electronic debit.
FutureCom would liquidate any position or positions upon any condition
of default including failure of a member to meet any margin call.
    In the event of a trader default on a margin call, that margin
would be delivered by FutureCom to the Clearing Bank on the day the
default occurred. FutureCom intends to keep at least one million
dollars in the form of a letter of credit on hand with the Clearing
Bank for each listed futures and option contract. The amount would be
increased according to the open interest in the listed contract to up
to eight million dollars for open interest over 80,000 contracts.
Additionally, FutureCom will accrue a reserve fund to be held by the
Clearing Bank in a separate reserve fund account and be available
against member defaults. From the transaction fees assessed in
connection with each trade, the Exchange will apply $1.00 per contract
to the reserve fund. Losses from trader defaults exceeding the
FutureCom guarantee would be borne pro rata by all members according to
the number of outstanding open contracts on the day of the default.
    FutureCom expects that generally, all members including those
members that otherwise maintain an account with an FCM, will enter
transactions on FutureCom directly. However, in some cases, FutureCom
members may, for a variety of reasons, prefer their FCM or other
intermediary, such as their commodity trading advisor, to enter orders
into the FutureCom system on their behalf. Any such intermediary, if
not a FutureCom member itself, would have to be approved and accepted
by FutureCom as an intermediary for the purpose of entering orders into
the trading system.\1\ The member would

[[Page 62568]]

give the FCM his I.D. and password for the purpose of entering the
order as instructed by the member.
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    \1\ Every member would be required to register the computer(s)
he/she/it intended to use to enter orders into FutureCom. Likewise,
any intermediary entering orders on behalf of a member would be
required to have the computer used to enter FutureCom orders
registered with FutureCom. Only orders from properly registered and
approved computers would be accepted into the FutureCom trading
system.
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    The Bylaws prohibit the entering of transactions designed to take
advantage of orders entered for another. These prohibitions include any
transaction that had been directly or indirectly prearranged, ones that
are in the nature of a wash sale, trading ahead, or the disclosing or
withholding of orders. FutureCom asserts, however, that generally, it
should be far more difficult, if not impossible, for many of the types
of unlawful trade practices to occur due to the fact that the
predominant number of orders will be entered directly by the member.
    FutureCom represents it will use due diligence in maintaining a
continuing affirmative action program to secure compliance with various
provisions of the Commodity Exchange Act and Commission regulations and
with its own Bylaws. This will include trade practice and market
surveillance programs designed and described by FutureCom to detect the
trade practice abuses mentioned above as well as market manipulation,
investigations of alleged violations of other rules, and disciplinary
procedures. FutureCom's proposed Compliance Procedures require all
intermediaries entering orders on behalf of members to comply fully
with the requirements of Commission Regulation 1.35(a-1) consistent
with the Commission's advisory relating to alternative methods of
compliance with written record requirements.\2\ FutureCom expects these
records to be generated electronically in connection with the order
entry process.
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    \2\ ``Alternative Method of Compliance With the Written Record
Requirements,'' 62 FR 7675 (February 20, 1997).
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    FutureCom intends to ask the National Futures Association (``NFA'')
to administer FutureCom's financial surveillance and arbitration
programs and examine the books and records of joint FutureCom-NFA
members relating to the members' business of dealing in commodity
futures and options and cash commodities insofar as such business
relates to their dealing on FutureCom. In this regard, therefore, NFA
would assume the responsibilities of FutureCom set forth in Commission
Regulations 1.51(a)(3) and 1.52(c) for all FCMs that are members of
both FutureCom and NFA. Concerning arbitration, Commission Regulation
180.3(b)(4) requires each Commission registrant to include a registered
futures association on a list of organizations that are qualified to
conduct customer arbitration proceedings. As NFA is required to accept
appropriate demands for arbitration, there is no need for a written
agreement between FutureCom and NFA regarding delegation of FutureCom's
arbitration program to NFA.
    The Commission's Office of Information Resources and Management has
reviewed the security of the proposed FutureCom trading system and
analyzed issues of system vulnerability and issues related to the
operation of the electronic trading system.

II. Request for Comments

    Any person interested in submitting written data, views, or
arguments on the proposal to designate FutureCom 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 Division seeks comment on
all aspects of FutureCom's application for designation as a new
contract market that would permit transmittal of orders over the
internet and match orders electronically. Comments should also include
the proposed clearing and settlement procedures, the ability of
FutureCom to fulfill its self regulatory duties, and any other issues
commenters believe the Commission should consider. Reference should be
made to the FutureCom application for designation as an automated
contract market for live cattle futures and options. Copies of the
proposed terms and conditions, Exchange rules, compliance procedures,
clearing and settlement description, and other related materials 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. Some
materials may be subject to confidential treatment pursuant to 17 CFR
145.5 or 145.9. Requests or copies of such materials should be made to
the FOI, 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 November 18, 1997.
Alan L. Seifert,
Deputy Director.
[FR Doc. 97-30806 Filed 11-21-97; 8:45 am]
BILLING CODE 6351-01-M

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