[Federal Register Volume 63, Number 126 (Wednesday, July 1, 1998)]
[Notices]
[Pages 35912-35914]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-17501]


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COMMODITY FUTURES TRADING COMMISSION


Application of Cantor Financial Futures Exchange as a Contract 
Market in U.S. Treasury Bond, Ten-Year Note, Five-Year Note and Two-
Year Note Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Application of the Cantor Financial Futures Exchange for 
initial designation as a contract market.

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SUMMARY: The Cantor Financial Futures Exchange, Inc. (``CFFE'' or 
``Exchange''), a New York not-for-profit corporation, has applied for 
designation as a contract market for the computer-based trading of US 
Treasury bond, ten-year note, five-year note and two-year note futures 
contracts. CFFE has been formed pursuant to an agreement between the 
New York Cotton Exchange (``NYCE'') and CFFE, LLC, a subsidiary of 
Cantor Fitzgerald, LP (``Cantor'').1 Under the agreement, 
CFFE trading would be conducted on the same trading system that another 
Cantor subsidiary, Cantor

[[Page 35913]]

Fitzgerald Securities, LLC (``CFS''), currently operates as an 
interdealer-broker in the US Treasury securities market. CFFE's 
regulatory responsibilities would be handled by NYCE. CFFE has not 
previously been approved by the Commission as a contract market in any 
commodity. Accordingly, in addition to the terms and conditions of the 
proposed futures contracts, the Exchange has submitted to the 
Commission a proposed trade-matching algorithm; proposed rules 
pertaining to CFFE governance, disciplinary and arbitration procedures, 
trading standards and recordkeeping requirements; and various other 
materials to meet the requirements for a board of trade seeking initial 
designation as a contract market. CFFE trades would be cleared and 
settled by the Commodity Clearing Corporation (``CCC'') which is wholly 
owned by NYCE. Notice of CFFE's application was previously published on 
February 3, 1997 (63 FR 5505) for a comment period ending on April 6, 
1998. That comment period was later extended until April 27, 1998 (63 
FR 17823 (April 10, 1998)). Since the Commission's original publication 
of the CFFE's proposal, the Exchange has made additional submissions to 
the Commission. Those submissions revise a number of features of CFFE's 
proposal and generally include further explication and supporting 
materials with respect to the entire proposal. The submissions are 
available for review in the Commission's public files.
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    \1\ CFFE, LLC is a limited liability company whose equity 
interest is held by Cantor (ninety-nine percent) and CFFE Holdings, 
LLC (one percent).
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    Acting pursuant to the authority delegated by Commission Regulation 
140.96, the Division of Trading and Markets (``Division'') has 
determined to publish CFFE's proposal again so that the public may 
review and comment on the Exchange's additional submissions. 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 with the 
purposes of the Commodity Exchange Act. The Division seeks comment 
regarding all aspects of CFFE's application and addressing any issues 
commenters believe the Commission should consider.

DATES: Comments must be received on or before July 16, 1998.

FOR FURTHER INFORMATION CONTACT: With respect to questions about the 
terms and conditions of CFFE's proposed futures contracts, please 
contact Thomas M. Leahy of the Division of Economic Analysis, Commodity 
Futures Trading Commission, at Three Lafayette Centre, 1155 21st 
Street, NW, Washington, DC 20581; Telephone number: (202) 418-5278; 
Facsimile number: (202) 418-5527; or Electronic mail: [email protected]. 
With respect to questions about any of CFFE's other proposed rules or 
related NYCE proposed rules, please contact David Van Wagner of the 
Division of Trading and Markets at the same address; Telephone number: 
(202) 418-5481; Facsimile number: (202) 418-5536; or Electronic mail: 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

    CFFE has applied for designation as a contract market for the 
computer-based trading of US Treasury bond, ten-year note, five-year 
note and two-year note futures contracts. CFFE 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 
contracts, the Exchange has submitted, among other things, proposed 
trade-matching algorithm procedures and rules pertaining to CFFE 
governance, trade practice surveillance, disciplinary and arbitration 
procedures, trading standards and recordkeeping requirements.
    CFFE would be wholly owned by CFFE Regulatory Services, LLC. Equity 
interest in CFFE Regulatory Services, LLC would be held entirely by 
NYCE (ten percent equity interest) and NYCE's members (ninety percent 
equity interest).\2\ CFFE's contracts would trade over a computer-based 
trading system maintained by CFS (the ``Cantor System''). CFS is an 
interdealer-broker in the US Treasury securities market, and it 
currently operates the Cantor System to match orders placed with it by 
broker-dealers and other customers. Although neither Cantor nor any of 
its affiliates would have any equity interest in CFFE, Cantor would 
collect a transaction fee for each trade executed at CFFE through the 
Cantor System.
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    \2\ NYCE would have the sole voting interest in CFFE Regulatory 
Services, LLC.
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    CFFE would be governed by a thirteen-person Board of Directors--
eight of whom would be appointed by Cantor and five of whom would be 
appointed by NYCE. Three of the eight CFFE directors appointed by 
Cantor would be public directors who could not be affiliated with the 
CFFE, NYCE or Cantor. NYCE would be responsible for providing all of 
CFFE's regulatory services including its compliance, surveillance, 
arbitration and disciplinary programs.\3\ Because of NYCE's involvement 
in CFFE's regulatory programs, all CFFE rule changes that involved 
regulatory procedures would have to be approved by NYCE's Board of 
Managers in addition to CFFE's Board of Directors.
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    \3\ In this regard, CFFE's proposed rules would incorporate by 
reference certain NYCE rules, such as its rules governing 
arbitration and disciplinary procedures.
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    CFFE proposes to trade each of its four contracts from 7:30 a.m. to 
5:30 p.m., New York time, on each business day. Under the proposal, all 
CFFE trading would be conducted through: (1) CFFE Class B Members 
(i.e., NYCE members), (2) CFFE Associate Members, or (3) futures 
commission merchants, introducing brokers and commodity trading 
advisors, without CFFE membership, who have entered into a guarantee 
agreement with a CCC clearing member to clear their CFFE trades. These 
persons and entities would be collectively referred to as Screen-Based 
Traders (``SBT'') under CFFE's rules. SBTs or their associated persons, 
referred to as Authorized Traders (``AT'') under CFFE's rules, would 
place orders, whether for their own or for their customers' accounts if 
they are properly registered, by phoning CFFE terminal operators 
(``TO'') \4\ located at a Cantor facility.\5\ For each order, the SBT 
or Authorized Trader who placed an order would be required to provide 
the TO with a customer or proprietary account identifier, the relevant 
contract and the quantity and price.\6\ The CFFE TO would promptly 
enter this information into the Cantor System via a terminal keyboard.
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    \4\ All CFFE TOs would be compensated by CFS.
    \5\ All phone conversations between SBTs or ATs and CFFE TOs 
would be recorded and time-indexed by a Cantor tape-recording 
system. CFFE proposes to retain those recordings for a 45-day 
period.
    \6\ SBTs and ATs also would be required to fill out an order 
ticket for each customer order.
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    The Cantor System would match eligible CFFE orders according to a 
trade-matching algorithm that would be similar to the algorithm that 
CFS currently uses to match orders as an interdealer-broker in the US 
Treasury securities market. Under the algorithm, the Cantor System 
would post the best bid (best offer) available at any given time and 
its quantity. Any inferior bids (offers) that were posted earlier would 
be removed from the System, while inferior bids (offers) entered 
subsequently would be rejected by the System. Responsive orders to hit 
outstanding bids (or take outstanding offers) would be matched with 
bids (offers) on a time-priority basis at the designated bid (offer) 
price. Under

[[Page 35914]]

CFFE's rules, accounts that placed such responsive orders would be 
known as ``aggressors.'' Aggressors who placed orders that hit all 
outstanding bids (take all outstanding offers) in the Cantor System at 
any particular time would be permitted to engage in an exclusive 
trading period with the best bidder (offeror). During this exclusive 
trading period, the aggressor and the best bidder (offeror) would 
``work up'' the quantity for a trade at the previously-established 
trade price. During this work up process, each party would be given 
alternating six-second periods either to agree to do a transaction at 
the quantity offered by the other party or to counteroffer for some 
other quantity. This work up process would continue until the parties 
agreed to a transaction quantity.\7\ During an exclusive trading 
period, the Cantor System would accept subsequent bids and offers at 
the same price as the ongoing trade, and these orders would be matched 
on a time-priority basis to the extent possible immediately upon the 
conclusion of the exclusive period. The CFFE would provide an exclusive 
trading period to participants who were earliest in posting best market 
bids and offers and to aggressors in order to create an incentive for 
participants to place orders at attractive prices and to provide 
liquidity.
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    \7\ The entire work up process would be conducted through CFFE 
TOs who would enter each party's desired quantity into the Cantor 
System. The System itself would automatically trigger the 
alternating six-second exclusive period for each party.
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    Upon the execution of a CFFE transaction, the TO would provide an 
oral confirmation of the trade to the submitting SBT or AT by telephone 
and the SBT or AT would record the details of the trade on an order 
ticket.\8\ Upon execution of a trade, the Cantor System also would 
electronically transmit matched-trade data to CCC for clearing and 
settlement purposes. For each trade, CCC would transmit transaction 
information to the appropriate clearing members via the Trade Input 
Processing System (``TIPS'').\9\ Clearing members would be required to 
accept or reject each trade within thirty minutes of its posting on 
TIPS.
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    \8\ TOs would receive and input orders from SBTs and ATs and 
relay back trade confirmations. TOs could not maintain any sort of 
order book or deck, nor could they exercise any discretion over 
orders.
    \9\ CCC estimates that CFFE trades would be posted on TIPS 
within fifteen minutes of their execution.
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    The Cantor System also would transmit relevant trade data to NYCE 
each day for compliance and surveillance purposes.
    Since the Commission's original publication of the CFFE's proposal 
for comment, the Exchange has revised a number of aspects of its 
proposal. Among the revisions, the CFFE has provided an extensive 
explanation of its TOs' responsibilities and restrictions and has 
stated that it would register all TOs with the Commission as floor 
brokers. The Exchange also has created a new membership category--
Associate Members--and has clarified that all holders of CFFE trading 
privileges who could execute customer orders would be Commission 
registrants. In addition, all trading privilege holders would, under 
CFFE's rules, be subjected to the Commission's Part 155 trading 
standards. The Exchange also has provided further explanation and 
justification of its trade-matching algorithm, including the procedures 
for exclusive trading periods and market-crossing sessions.
    Finally, among the more significant additions to its submission, 
the CFFE has determined that the CCC, rather than the New York Board of 
Clearing, would clear and settle Exchange transactions. It also has 
submitted an extensive description of CFFE's compliance and 
surveillance programs and the role of NYCE staff in administering these 
programs.

III. Request for Comments

    Any person interested in submitting written data, views, or 
arguments on the proposal to designate CFFE 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 CFFE's application for designation as a new contract 
market, as well as CCC's proposal to serve as CFFE's clearing 
organization. Reference should be made to the CFFE application for 
designation as a contract market in US Treasury bond, ten-year note, 
five-year note and two-year note futures contracts. Copies of the 
proposed terms and conditions 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.
    Other materials submitted by CFFE and CCC may be available upon 
request pursuant to the Freedom of Information Act (5 U.S.C. 552), 
except to the extent that they are entitled to confidential treatment 
pursuant to 17 CFR 145.5 or 145.9. Requests for copies of such 
materials should be made to the Freedom of Information, 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 June 25, 1998.
Alan L. Seifert,
Deputy Director.
[FR Doc. 98-17501 Filed 6-30-98; 8:45 am]
BILLING CODE 6351-01-U