[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Notices]
[Pages 16899-16902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9506]



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COMMODITY FUTURES TRADING COMMISSION


Trading and Clearing Link Between the Chicago Board of Trade and 
the London International Financial Futures and Options Exchange

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of the proposed trading and clearing linkage for certain 
financial products between the Chicago Board of Trade and the London 
International Financial Futures and Options Exchange and proposed rules 
and rule amendments to implement the linkage.

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SUMMARY: The Chicago Board of Trade (``CBT'' or ``Exchange'') has 
submitted a proposal to implement a trading and clearing link 
(``Link'') with the London International Financial Futures and Options 
Exchange (``LIFFE''). Pursuant to the Link, CBT and LIFFE would trade 
their major financial futures and options contracts on each other's 
floors by open outcry. Effectively, the link would permit ``cross 
listing'' of CBT and LIFFE futures contracts. Market users could 
establish a position in a LIFFE-designated contract in Chicago which 
would be transferred to The London Clearing House (``LCH'') the same 
day and be recognized as a LIFFE position. Market users could also 
establish a position in a CBT-designated contract in London which would 
be transferred to the Board of Trade Clearing Corporation (``BOTCC'') 
the same day and be recognized as a CBT position. Conceptually, a CBT-
designated contract would be executed on LIFFE, initially matched by 
LCH, and then transferred to BOTCC for clearing and vice-versa. All 
contracts traded through the Link would be completely fungible. Acting 
pursuant to the authority delegated by Commission Regulation 140.96, 
the Division of Trading and Markets has determined to publish the 
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 May 20, 1996.

FOR FURTHER INFORMATION CONTACT: Lois Gregory, Attorney, Division of 
Trading and Markets, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5483.

[[Page 16900]]

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

    By letters dated July 28, 1995 through March 1, 1996, CBT submitted 
a proposal, including proposed new rules and rule amendments, for 
Commission approval under Section 5a(a)(12)(A) of the Commodity 
Exchange Act (``Act'') and Commission Regulation 1.41(b) to implement a 
trading and clearing Link with the LIFFE. CBT states that, through the 
Link, it and LIFFE intend to provide more extensive risk transfer 
opportunities for their members and users of the markets, and to 
facilitate price discovery for the benefit of persons who rely on 
internationally disseminated price information.

A. Contracts and Hours

    Under the Link, CBT and LIFFE would trade their major financial 
futures and options contracts on each other's floors by open outcry. 
Market users could establish a position in a LIFFE-designated contract 
in Chicago which typically would be transferred to LCH the same day and 
be recognized as a LIFFE position. Markets users could also establish a 
position in a CBT-designated contract in London which typically would 
be transferred to BOTCC the same day and be recognized as a CBT 
position. All open positions in contracts traded under the proposal 
automatically would transfer from the executing exchange to the 
``home'' exchange at the end of the trading day.1
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    \1\ Options could be exercised only after being transferred to 
the home exchange. All deliveries would be at the home exchange.
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    At the commencement of the Link, CBT would list for trading futures 
and options on LIFFE's German Government Bond contract and LIFFE would 
list for trading futures and options on the CBT's U.S. Treasury Bond 
contract.2 The CBT has proposed to amend its German government 
bond futures and option contracts to be fungible with the corresponding 
LIFFE contracts.3
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    \2\ CBT and LIFFE also propose eventually to have CBT's ten and 
five year U.S. Treasury Note futures and options contracts 
introduced for trading on LIFFE and futures and options on LIFFE's 
Long-Term British Gilts and Italian Government Bonds introduced for 
trading on the CBT.
    \3\ Likewise, LIFFE would have contracts which would be fungible 
with CBT contracts.
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    All contracts traded through the Link would be completely fungible. 
Accordingly, to accomplish this, the CBT would modify the terms and 
conditions of its contracts which would be traded on both the CBT and 
LIFFE so that they would be identical to those of the LIFFE 
contracts.\4\
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    \4\ In its rules, the CBT's contracts traded on the Link are 
referred to as ``LIFFE designated contracts trading on CBT''.
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    The products would have the following open outcry trading day at 
the two exchanges (central daylight savings time/location of trading in 
bold):

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                                                      Chicago                             London                
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Treasury Bonds:                                                                                                 
    CBT..................................  6:20 p.m.-9:05 p.m..........  12:20 a.m.-3:05 a.m.                   
    LIFFE................................  1:30 a.m.-7:00 a.m..........  7:30 a.m.-1:00 p.m.                    
    CBT..................................  7:20 a.m.-2:00 p.m..........  1:20 p.m.-8:00 p.m.                    
German Bunds:                                                                                                   
    CBT..................................  6:20 p.m.-9:05 p.m..........  12:20 a.m.-3:05 a.m.                   
    LIFFE................................  1:30 a.m.-10:15 a.m.........  7:30 a.m.-4:15 p.m.                    
    CBT..................................  10:20 a.m.-2:00 p.m.........  4:20 p.m.-8:00 p.m.                    
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    There would be time breaks between the cessation of trading on the 
LIFFE and the trading resumption of Link products on the CBT to provide 
for an orderly transition from one market place to the other. There 
would be no overlap in open outcry trading in the contracts between the 
two exchanges.
    Each exchange has an electronic trading system \5\ and each 
initially would operate its system during a portion of the other's 
open-outcry sessions. However, when linkage volume reached a specified 
level, electronic trading would be turned-off during open-outcry 
sessions for the linkage contracts.
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    \5\ CBT's electronic trading system is known as Project A. LIFFE 
operates the Automated Pit Trading system, referred to as ``APT.''
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B. Trading and Clearing

    The Link is designed to allow market users to enter and leave the 
market without regard to whether their trades are executed in London or 
Chicago, and to permit a contract executed at the executing exchange to 
be transformed into the contract of the home exchange upon its transfer 
to the home clearinghouse. Each day under the Link, each clearing 
member's gross long and gross short open position balance in LIFFE-
designated contracts traded on CBT would be transferred at CBT's 
closing price to the account of a LIFFE clearing member counterpart via 
LCH for clearing and settlement. Transactions initially would be 
matched by BOTCC, but upon transfer to LCH, would be converted to a 
LIFFE futures or option contract and then confirmed to the customer as 
such at the trade price determined on the CBT floor. Similarly, each 
LCH clearing member's gross long and gross short open position balance 
in CBT-designated contracts traded on LIFFE would be transferred at 
LIFFE's closing price to the account of a CBT clearing member 
counterpart via BOTCC for clearing and settlement. Transactions 
initially would be matched by LCH, but upon transfer to BOTCC would be 
converted to a CBT futures or option contract at the trade price 
determined on the LIFFE floor.
    Market participants also would have the option of having daytrade 
positions entered into on the executing exchange offset prior to 
transfer thereby reducing associated costs. A market participant also 
could have a position open at the home exchange offset by a designated 
link position that has been transferred.
    The clearing organization for the executing exchange would be 
responsible for trades up until the moment they were transferred to the 
home clearing organization. At the moment of the transfer of positions, 
the home clearing organization would be responsible and the clearing 
guarantee of that organization would attach. The home clearing 
organization would guarantee the other side of the market in the same 
manner and with the same resources used to guarantee transactions 
executed on the home exchange. Open positions in linkage contracts 
could not be transferred from the executing exchange to the home 
exchange on holidays at the home exchange. In those cases, all 
transactions would continue to be held by the executing exchange until 
the home exchange's next business day.
    Firms which executed trades for LIFFE-designated products in 
Chicago would be required to be an LCH clearing member or enter into a 
Link clearing agreement with a single LCH clearing

[[Page 16901]]

member. Likewise, firms who executed trades for CBT-designated products 
in London would be required to be BOTCC clearing members or enter into 
a Link clearing agreement with a single BOTCC clearing member. These 
agreements would require the receiving clearing member to accept the 
transferor's entire open position balance, except in accordance with 
specified criteria for rejection, such as, for example, the bankruptcy 
of the transferor or the termination of its rights to act as a clearing 
member. In order to trade under the Link, a non-clearing member of 
either exchange would have to have clearing arrangements for designated 
contracts trading with a home exchange clearing member that has entered 
into a relevant Link clearing agreement.
    Contracts traded under the Link would be added to the contract's 
existing open interest on the home exchange. Link contract volume would 
be recorded by the executing exchange. With respect to positions 
transferred through the Link, the home exchange and clearing 
organization would be entitled to charge their respective fees, but at 
rates no higher than those normally charged. The home exchange and 
clearing organization would not impose fees on trades which were not 
transferred through the Link, i.e., daytrades offset on the executing 
exchange. If the average daily trading volume for a contract traded on 
the executing exchange was more than 20% of the average daily trading 
volume on the home exchange for the same period, the parties could take 
whatever action deemed appropriate, including suspending trading over 
the Link of that particular contract. The contract would then be traded 
only on the home exchange, with open interest, of course, attributable 
to the home exchange.

C. Margin

    Both BOTCC and LCH would collect margin to minimize the risk of 
carrying positions executed under the Link. For LIFFE-designated 
contracts traded on CBT, BOTCC would transfer the day position balance 
to LCH at CBT's 2:00 p.m. closing price on trade day, ``T''. Transfer 
would take place between 4:00 p.m. and 5:00 p.m., Chicago time, and 
BOTCC would calculate a variation on all LIFFE-designated positions it 
had cleared for the trading day against its closing prices. LCH would 
receive the transferred positions at CBT's closing price and calculate 
a variation against its own earlier close-of-market settlement price. 
Although bank commitments would have been received earlier, each 
clearing house actually would collect the variation on T+2.\6\
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    \6\ This variation would be collected on T + 1 for futures and 
options on Long-Term British Gilts. See footnote 2, supra.
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    For CBT-designated contracts trading on LIFFE, LCH would transfer 
open positions to BOTCC at approximately 10:00 a.m., Chicago time. 
Positions would be transferred at the LCH closing price and LCH would 
calculate variation based on this price and would collect on T+1. BOTCC 
would determine the settlement price based on its afternoon close and 
would calculate and collect variation on the transferred positions as 
part of its routine, mid-day variation call. Each home clearing firm 
would reimburse each executing clearing firm for the variation paid to 
the executing clearing organization. Conversely, each home clearing 
firm would receive from the executing clearing firm any variation paid 
by the executing clearing organization.
    For CBT-designated option contracts purchased on LIFFE, LCH would 
collect the full option premium. So that linked contracts would be 
fully fungible and to avoid pricing discrepancies, CBT proposes, 
pursuant to Commission Regulation 33.11, that the Commission exempt 
LIFFE-designated options purchased on CBT from the requirement of 
Commission regulation 33.4(a)(2) 7 and allow them to be margined 
futures-style.
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    \7\ Commission Regulation 33.4(a)(2) requires that the full 
amount of each option premium be received from each option customer 
at the time the option is purchased.
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    BOTCC and LCH would collect original margin on a position executed 
on the executing exchange when the day after the trade day was a 
holiday for the home clearing organization. Transfer of funds and 
positions would resume on the next business day. BOTCC would also 
collect original margin for LIFFE-designated positions it held 
overnight from its evening trading session.
    LIFFE-designated contracts would be traded and settled in various 
currencies. CBT-designated contracts would be traded and settled in 
U.S. dollars.
    The Link is intended to be seamless to customers. To aid in this 
endeavor, CBT proposes that contracts traded under the Link be subject 
to consistent segregation treatment before and after funds and 
positions were transferred from the executing exchange to the home 
clearing organization. U.S. customer funds associated with contracts 
executed on LIFFE normally would be subject to Commission Regulation 
30.7 and customer funds associated with contracts executed on CBT 
normally would be subject to Section 4d of the Act. CBT proposes that 
customer funds used to secure positions in CBT-designated contracts 
traded on LIFFE be held by U.S. clearing firms under Section 4d of the 
Act before as well as after those positions were transferred to BOTCC. 
Customer funds used to secure positions in LIFFE-designated contracts 
traded on CBT would be classified as Commission Regulation 30.7 funds 
before as well as after those positions were transferred to LCH.8 
The parties anticipate this would avoid potential operational 
difficulties and accounting problems, fulfill customer expectations 
that funds and positions would be held in the manner required in the 
location where the ultimate clearing organization is located, and 
further the concept of full fungibility of contracts.
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    \8\ The Commission is exploring the appropriate treatment of 
CBT-designated positions for the period held in the United Kingdom 
to assure appropriate protection of U.S. based segregation deposits.
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    Deliveries and options exercises of all linkage contracts would 
take place through the home exchange and in accordance with the 
requirements of the home exchange. All deliveries in U.S. Treasury 
products would occur through BOTCC and its clearing members. All 
deliveries in LIFFE contracts would occur through LCH and its clearing 
members.

D. Oversight

    Linkage contracts would be traded under the rules of the executing 
exchange. Therefore, the trading of LIFFE-designated contracts on CBT 
would be subject to CBT rules and regulations. Exchange-for-physical 
(``EFP'') transactions on CBT-designated contracts would continue to be 
submitted to BOTCC. EFPs would not be permitted on LIFFE-designated 
contracts. CBT would not operate any system of price limits or operate 
an average pricing system with respect to LIFFE-designated contracts. 
Crossing of transactions on the executing exchange could be permitted, 
but only in a manner which conformed with the rules of the home 
exchange.
    Proposed CBT rules would provide that it would be an act 
detrimental to the interest and welfare of CBT for a member to be found 
by LIFFE to have committed a material violation of LIFFE's rules, and 
any CBT member sanctioned by LIFFE could be suspended until the 
sanction was satisfied.
    The parties would share information to enable effective 
surveillance and investigations related to designated linkage 
contracts. Each exchange and its

[[Page 16902]]

clearing house would be entitled to take such action under its rules to 
deal with a market emergency as it in its discretion deemed fit and 
would consult with all other parties on the matter as soon as 
practicable.

II. Request for Comments

    The Commission requests comments from interested persons concerning 
any aspect of the proposed trading and clearing link between the CBT 
and LIFFE that commenters believe raises issues under the Act or 
Commission regulations.
    Copies of the proposed rules, illustrations of accounting detail 
for transfer of positions and funds and other related materials are 
available for inspection at the Office of the Secretariat, Commodity 
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, 
N.W., Washington, D.C. 20581. 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.
    Any person interested in submitting written data, views, or 
arguments on the proposal or proposed new rules or rule amendments 
should send such comments to Jean A. Webb, Secretary, Commodity Futures 
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW., 
Washington, DC 20581 by the specified date.
Alan L. Seifert,
Deputy Director.
[FR Doc. 96-9506 Filed 4-17-96; 8:45 am]
BILLING CODE 6351-01-P