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