[Federal Register Volume 64, Number 111 (Thursday, June 10, 1999)]
[Notices]
[Pages 31193-31195]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-14712]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Petition for Exemption From the Statutory 
Dual Trading Prohibition in the Ten-Year U.S. Treasury Note Futures 
Contract Traded on the Project A Electronic Trading System

AGENCY: Commodity Futures Trading Commission.

ACTION: Amended order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
amending its February 26, 1999 Order granting the Chicago Board of 
Trade (``CBT'') or ``Exchange'') an exemption from the statutory 
prohibition against dual trading in the U.S. Treasury Bond futures 
contract (``T-Bond'') traded on its Project A electronic trading system 
to include the Ten-Year U.S. Treasury Note (``Ten-Year T-Note'') 
futures contract traded on Project A.

DATES: This Order is to be effective June 4, 1999.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansly, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
Three Lafayette Center, 1155 21st St., NW., Washington, DC 20581; 
telephone (202) 418-5490.

SUPPLEMENTARY INFORMATION: On February 26, 1999, the Commission issued 
an Order granting CBT an exemption from the statutory dual trading 
prohibition for its T-Bond futures contract as traded on the Exchange's 
electronic trading system, Project A.\1\ In issuing the Order, the 
Commission found that CBT met the standards for granting a dual trading

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exemption contained in section 4j(a) of the Commodity Exchange Act 
(``Act'') and Commission Regulation 155.5 with regard to Project A T-
Bond futures.
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    \1\ 64 FR 10450 (March 4, 1999). A copy of this Order is 
attached as Appendix A.
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    By letter dated March 15, 1999, shortly after the Order was issued, 
CBT notified the Commission that its Ten-Year T-Note futures contract 
traded on Project A had become an affected contract market as well, and 
supplemented its Petition for Exemption from the Dual Trading 
Prohibition to include that contract.\2\ The Exchange has represented 
by letter dated April 20, 1999, that, with respect to the February 26, 
1999 Order exempting Project A T-Bond futures from the dual trading 
prohibition, there have been no material changes concerning the 
operation of the Project A system or to CBT's trade monitoring system 
as applicable thereto. Therefore, the Commission finds that CBT meets 
all relevant standards for granting a dual trading exemption for the 
Ten-Year T-Note future contract as traded on Project A.
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    \2\ An ``affected contract market'' is a contract market with an 
average daily volume equal to or in excess of 8,000 contracts for 
each of four quarters during the most recent volume year. Commission 
Regulation 155.5(a)(9). See section 4j(a)(4) of the Act. Under 
section 4(j(a) of the Act and Regulation 155.5(b), the dual trading 
prohibition applies to each affected contract market. The 
Commission, therefore, must consider separately each affected 
contract market. As noted by the Commission in promulgating 
Regulation 155.5, a contract market trading on an exchange floor 
will be considered separate from a contract market in the same 
commodity trading on a screen-based system such as Project A. See 58 
FR 40335 (July 28, 1993).
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    Accordingly, on this date, the Commission hereby amends its 
February 26, 1999 Order granting CBT's Petition for Exemption from the 
Dual Trading Prohibition for trading on Project A of its electronically 
traded U.S. Treasury Bond futures contracts to include an exemption for 
CBT's electronically traded Ten-Year U.S. Treasury Note futures 
contract.
    For this exemption to remain in effect, CBT must demonstrate on a 
continuing basis that it meets the relevant statutory and regulatory 
requirements. The Commission will monitor continued compliance through 
its rule enforcement review program and any other information it may 
obtain about CBT's program.
    The provisions of this Order shall be effective on the date on 
which it is issued and shall remain in effect unless and until its is 
revoked in accordance with section 8e(b)(3)(B) of the Commodity 
Exchange Act, 7 U.S.C. 12e(b)(3)(B). If other CBT contracts 
electronically traded on Project A become affected contracts after the 
date of this Order, the Commission may expand this Order in response to 
an updated petition that includes those contracts.
    It is so ordered.

    Dated: June 4, 1999.
Jean A. Webb,
Secretary to the Commission.

APPENDIX A--COMMODITY FUTURES TRADING COMMISSION

Chicago Board of Trade Petition for Exemption From the Dual Trading 
Prohibition in the U.S. Treasury Bond Futures Contract Traded on the 
Project A Electronic Trading System

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') 
is granting the petition of the Chicago Board of Trade (``CBT'' or 
``Exchange'') for exemption from the prohibition against dual 
trading in the U.S. Treasury Bond futures contract traded on its 
Project A electronic trading system.

DATES: This Order is to be effective February 26, 1999.

FOR FURTHER INFORMATION CONTACT: Andrew S. Baer, Attorney-Advisor, 
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: On January 31, 1998, the Chicago Board of 
Trade (``CBT'' or ``Exchange'') submitted a Petition for Exemption 
From the Dual Trading Prohibition for its affected U.S. Treasury 
Bond (``T-Bond'') futures contract \1\ as traded on the Exchange's 
electronic trading system, Project A. Upon consideration of this 
petition and other matters of record, the Commission hereby finds 
that CBT meets the standards for granting a dual trading exemption 
contained in section 4j(a) of the Act and Commission Regulation 
155.5 with regard to Project A T-Bond futures.\2\
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    \1\ An ``affected contract market'' is a contract market with an 
average daily volume equal to or in excess of 8,000 contracts for 
each of four quarters during the most recent volume year. Commission 
Regulation 155.5(a)(9). See section 4j(a)(4) of the Commodity 
Exchange Act (``Act''). Under section 4j(a) of the Act and 
Regulation 155.5(b), the dual trading prohibition applies to each 
affected contract market. The Commission, therefore, must consider 
separately each affected contract market. As noted by the Commission 
in promulgating Regulation 155.5, a contract market trading on an 
exchange floor will be considered separate from a contract market in 
the same commodity trading on a screen-based system such as Project 
A. See 58 FR 40335 (July 28, 1993). Therefore, Project A T-Bonds 
must be considered independently of the CBT's floor-traded T-Bond 
contract market, which was included in the Exchange's exemption 
petition for its affected open outcry contract markets.
    \2\ The burden to prove that the exemption standards of the Act 
and Commission regulations are met rests exclusively on the contract 
market. The dual trading provisions set forth in section 4j of the 
Act and the standards for trade monitoring systems provided in 
section 5a(b) of the Act were enacted as part of the Futures Trading 
Practices Act of 1992 (``FTPA''). Pub. L. 102-546, 101, 106 Stat. 
3590 (1992). The FTPA's legislative history makes clear that the 
burden to prove that the exemptions standards are met rests upon the 
contract market. For instance, the 1992 House-Senate Conference 
Committee stated that ``a board of trade may satisfy the initial 
burden of demonstrating that each of its designated contract markets 
complies with trade monitoring system requirements of section 5a(b) 
of the Act, subject to requests for further information by the 
Commission, by showing that it has maintained an ongoing record of 
compliance with those requirements.'' H.R. Conf. Rep. No. 102-978 at 
53 (1992). The Conference Committee adopted the 1991 House Bill's 
(H.R. 707) dual trading provisions, with amendments relating to 
exemptions. Id. at 50. The 1991 Senate Bill (S. 207) similarly 
placed on the exchange the burden to demonstrate the ability of its 
systems to meet the standards and reiterated the view, previously 
expressed in the 1989 Senate Bill (S. 1729), that an exchange has 
the best access to its own records and therefore is in the best 
position to show that its systems are effective and satisfactory. S. 
Rep. No. 102-22 at 32 (1991); S. Rep. No. 101-191 at 39-40 (1989).
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    Subject to CBT's continuing ability to demonstrate that it meets 
applicable requirements, the Commission specifically finds that CBT 
maintains a trade monitoring system for Project A which is capable 
of detecting and deterring, and is used on a regular basis to detect 
and deter, all types of violations attributable to dual trading and, 
to the full extent feasible, other violations involving the making 
of trades and execution of customer orders, as required by section 
5a(b) of the Act and Commission Regulation 155.5. The Commission 
further finds that CBT's trade monitoring system for Project A T-
Bonds includes audit trail and recordkeeping systems that satisfy 
sections 4j(a)(3) and 5a(b) of the Act and Commission Regulations 
1.35 and 155.5.\3\
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    \3\ 17 CFR 1.35, 155.5. Section 4j(a)(3) requires the Commission 
to exempt a contract market from the prohibition against dual 
trading upon finding that the monitoring system in place at the 
contract market satisfies the requirements of section 5a(b), 
governing audit trails and trade monitoring systems, with regard to 
violations attributable to dual trading at such contract market. If 
the trade monitoring system does not satisfy the requirements, 
section 4j(a)(3) requires the Commission to deny the exemption or in 
the alternative to exempt a contract market from the prohibition 
against dual trading on stated conditions upon finding that there is 
a substantial likelihood that a dual trading prohibition would harm 
the public interest in hedging or price basing and that corrective 
actions are sufficient and appropriate to bring the contract market 
into compliance with the standards set forth in section 5a(b). 
Regulation 155.5(b) prohibits floor brokers from dual trading in an 
affected contract market unless that contract market is exempted 
under Regulation 155.5(d).
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    With respect to each required component of the trade monitoring 
system, the Commission finds as follows:
    (a) Physical Observation of Trading Areas--The requirements of 
section 5a(b)(1)(A) of the Act are not relevant to Project A 
trading, insofar as Project A is a computerized, screen-based system 
and therefore has no floor.
    (b) Audit Trail and Recordkeeping Systems--The Exchange's trade 
monitoring system for Project A T-Bonds satisfies the audit trail 
standards of section 5a(b)(1)(B) of the Act in that it is capable of 
capturing essential data on the terms, participants, and

[[Page 31195]]

sequence of transactions. The requirements of that Section regarding 
the capture of relevant data on unmatched trades and outtrades are 
not relevant to Project A trading, as unmatched trades and outtrades 
cannot occur on the Project A system. The Commission further finds 
that CBT accurately and promptly records the essential data on 
terms, participants, times (in increments of no more than one minute 
in length), and the sequence of Project A trades through a means 
that is unalterable, continual, independent, reliable, and precise, 
as required by section 5a(b)(3) of the Act. This includes the real-
time submission of trades to clearing as they are matched by the 
system. Consistent with the guidelines to Commission Regulation 
155.5, the Commission also finds that CBT has demonstrated the use 
of Project A T-Bond trade timing data in its surveillance systems 
for dual trading-related and other abuses.
    The audit trail produced by Project A for T-Bond futures 
includes trade execution times that are presumptively 100 percent 
accurate (barring computer malfunction) and precise to within \1/
100\th of a second. All trades are also recorded in the exact 
sequence of occurrence. Among other things, the order ticket 
timestamps required by Regulation 1.35(a-1) are automatically 
furnished by the system, independent of the person making the trade, 
as is the order number. Project A also automatically records the 
time at which a terminal operator enters an order, the time when an 
order is matched to make a trade, the time the system generates a 
confirmation message to a terminal operator, and the time of any 
changes to an order. Once entered, orders and records of changes to 
orders are unalterable and cannot be deleted. If an order cannot be 
entered immediately upon its receipt by a terminal operator, the 
order is recorded on a written order ticket, timestamped, and then 
entered when possible. For every Project A order, either this order 
ticket timestamp or the order entry time recorded by the system acts 
as the broker receipt time required by section 5a(b)(3)(B) of the 
Act.
    CBT satisfies the requirements of section 5a(b)(1)(B) of the Act 
by maintaining an adequate recordkeeping system that is able to 
capture essential data on the terms, participants, and sequence of 
transactions executed on Project A. The Exchange uses such data as 
well as information on violations of such requirements on a 
consistent basis to bring appropriate disciplinary actions relating 
to Project A trading.
    (c) Surveillance Systems and Disciplinary Action--As required by 
sections 5a(b)(1)(C), (D), and (F) of the Act, CBT uses information 
generated by its trade monitoring and audit trail systems on a 
consistent basis to bring appropriate disciplinary action for 
violations relating to the making of trades and execution of 
customer orders on Project A. In addition, CBT assesses meaningful 
penalties against violators.
    On a daily basis, CBT reviews computerized surveillance 
exception reports to detect dual trading-related and other trading 
abuses on Project A. All relevant trade data are included in these 
reports. The exception reports are designed to identify such 
suspicious activity as trading ahead, frontrunning, trading against, 
crossing orders, and wash trading. Since the introduction of side-
by-side (simultaneous Project A and open outcry) trading of T-Bonds 
in September 1998, CBT has begun using a specialized exception 
report designed to identify certain trading ahead violations that 
use both the Project A and open outcry markets. The CBT has stated 
that it intends to develop systems and programs that integrate 
survelliance of its Project A and open outcry markets. The Exchange 
should be diligent in pursuing this process.
    From January, 1997 through December, 1998, the Exchange 
initiated 21 investigations into all types of possible abuses on 
Project A, nine of which had been closed as of December, 1998. One 
of those nine was closed within the four-month objective set forth 
in Commission Regulation 8.06, and another three were closed within 
four to six months. Thus, only 44 percent of those Project A 
investigations opened and closed during 1997-98 were closed within 
six months. If CBT cannot complete its Project A investigations 
within the objective set by Regulation 8.06, it should provide the 
reasons why such investigations require more than four months to 
complete. Based on examination of its computerized surveillance 
reports, CBT initiated four dual trading-related investigations 
during that period, one of which resulted in referral to a 
disciplinary committee. As of December 1998 that case was still 
pending. In other Project A-related disciplinary actions, the 
Exchange levied $20,000 in fines, imposed one ten-day suspension, 
and issued four reprimands.
    (d) Commitment of Resources--The Commission finds that CBT meets 
the requirements of section 5a(b)(1)(E) by committing sufficient 
resources for its trade monitoring system relating to Project A, 
including automating elements of such trade surveillance system, to 
be effective in detecting and deterring violations. CBT also 
maintains an adequate staff to investigate and to prosecute 
disciplinary actions.
    Accordingly, on this date, the Commission hereby grants CBT's 
Petition for exemption from the dual trading prohibition for trading 
on Project A of its electronically traded U.S. Treasury Bond futures 
contracts.
    For this exemption to remain in effect, CBT must demonstrate on 
a continuing basis that it meets the relevant statutory and 
regulatory requirements. The Commission will monitor continued 
compliance through its rule enforcement review program and any other 
information it may obtain about CBT's program.
    The provisions of this Order shall be effective on the date on 
which it is issued and shall remain in effect unless and until it is 
revoked in accordance with section 8e(b)(3)(B) of the Commodity 
Exchange Act, 7 U.S.C. 12e(b)(3)(B). If other CBT contracts 
electronically traded on Project A become affected contracts after 
the date of this Order, the Commission may expand this Order in 
response to an updated petition that includes those contracts.
    It is so ordered.

    Dated: February 26, 1999.
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 99-14712 Filed 6-9-99; 8:45 am]
BILLING CODE 6351-01-M