[Federal Register Volume 64, Number 194 (Thursday, October 7, 1999)]
[Notices]
[Pages 54620-54621]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26121]


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COMMODITY FUTURES TRADING COMMISSION


Cantor Financial Futures Exchange's Proposal To Adopt Block 
Trading Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed new rules and rule amendments of the Cantor 
Financial Futures Exchange to establish block trading procedures and 
request for comment.

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SUMMARY: The New York Board of Trade, on behalf of the Cantor Financial 
Futures Exchange, Inc. (``CX'' or ``Exchange''), has submitted proposed 
new rules and rule amendments to the Commission that would establish 
block trading procedures at CX. 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 
had been agreed to, the counterparties would report the relevant 
details of the transaction to the Exchange for clearing and settlement. 
CX's proposal is the first 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 CX'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 October 22, 1999.

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 to (202) 418-5221 or by electronic mail to 
[email protected]. Reference should be made to the ``Cantor Financial 
Future 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 Commodity Futures Trading Commission issued an 
Advisory on Alternative Execution, or Block Trading, Procedures for the 
Futures Industry.\1\ 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 a 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 execution procedures and 
has the ability to develop procedures that reflect the particular 
characteristics and needs of its individual markets and market 
participants.
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    \1\ 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 Transactions 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 execution 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.
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    After the issuance of the Advisory, the New York Board of Trade, on 
behalf of CX, submitted proposed new CX Rules 4-A and 305-A and 
proposed amendments to CX Rules 300, 302, and 306 to the Commission 
pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulation 
1.41(c).\2\ The proposed new rules and rule amendments would establish 
block trading procedures at CX. 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 
had been agreed to, the counterparties would report the relevant 
details of the transaction to CX for clearing and settlement. Thus, 
under the proposed procedures, certain futures transactions could be 
executed noncompetitively rather than through CX's electronic order-
matching system.
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    \2\ See Letter from Ms. Audrey R. Hirschfeld, Senior Vice 
President and General Counsel, New York Board of Trade to Ms. Jean 
A. Webb, Secretary, Commodity Futures Trading Commission, dated 
September 15, 1999.
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II. Description of the Proposed Block Trading Procedures

A. Eligible Contracts and Market Participants

    Under the proposed procedures, block trading would be permitted in 
any contract that has been designated by CX for such purpose. CX is 
seeking to permit block trading in those contracts for which it has 
been designated as a contract market by the Commission.\3\ CX's 
proposal also would restrict block trading to those market participants 
that qualify as an ``eligible participant'' as that term is defined by 
Commission Regulation 36.1(c)(2). However, a commodity trading advisor 
registered under 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 enter into block

[[Page 54621]]

transactions on behalf of customers without these customers having to 
qualify as ``eligible participants'' under Commission Regulation 
36.1(c)(2).
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    \3\ Such contracts include: (1) U.S. Treasury Bond futures; (2) 
U.S. Treasury Ten-Year Note futures; (3) U.S. Treasury Five-Year 
Note futures; and (4) U.S. Treasury Two-Year Note futures.
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    A ``Clearing Member,'' ``Screen Based Trader,'' or ``Foreign Screen 
Based Trader,'' as these terms are defined in CX's rules, would be able 
to enter into block transactions either on a proprietary basis or, if 
otherwise permitted, on behalf of customers or other third parties. 
These entities (or any of their affiliates) would be eligible to 
execute block transactions on a proprietary basis only if they were 
``Primary Market Makers'' in the relevant contract market.\4\ In 
addition, only Primary Market Makers would be allowed to make markets 
in block trades. Block transactions executed directly between two 
Primary Market Makers, or between a Primary Market Maker represented by 
an agent and another Primary Market Maker would be prohibited.
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    \4\ In connection with its block trading procedures, CX would 
create a new class of market makers called ``Primary Market 
Makers.'' Subject to the terms and conditions of the market making 
agreement entered into the CX, a Primary Market Maker would be 
obligated to make markets in the underlying contract market 
throughout the trading session except for short intervals.
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B. Size and Price Requirements

    Each buy or sell order underlying a block trade must authorize its 
execution through CX's proposed block trading procedures and must be 
for at least 50 contracts.\5\ This minimum size requirement would 
increase once the average monthly trading volume on CX with respect to 
the relevant contract reached certain thresholds for three consecutive 
months. Specifically,the minimum size would increase to 75, 100, 200, 
and 250 contracts once the average monthly trading volume on CX 
exceeded 25,000, 50,000, 100,000, and 150,000 contracts, respectively, 
for three consecutive months with respect to the relevant contract.\6\ 
The price of a block trade must be ``fair and reasonable'' in light of: 
(1) The size of such block trade; and (2) the price and size of other 
trades in the same contract at the relevant time.
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    \5\ Generally, under CX's proposed block trading procedures, 
orders from different accounts may not be aggregated to satisfy the 
minimum size requirement. However, a commodity trading advisor 
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 of 
the Commission's regulations) with total assets under management 
exceeding $50 million may aggregate orders from different accounts 
to satisfy the minimum size requirement.
    \6\ Since the inception of CX trading in September 1998, none of 
CX's four Treasury securities futures contracts have ever averaged a 
monthly trading volume in excess of 25,000 contracts. In the three-
month period from June to August 1999, CX's Treasury bond futures 
contract, the Exchange's highest volume contract, had an average 
monthly trading volume of 15,383 contracts.
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C. Transparency

    Each block trade executed in accordance with CX's proposed block 
trading procedures must be cleared through Clearing Members of the 
Exchange. Information identifying the relevant contract, contract 
month, price, quantity, time of execution and counterparty Clearing 
Member for each block trade must be reported to CX within ten minutes 
immediately following its execution. In the case of a block trade that 
is executed during the last ten minutes of the trading session on any 
given day or after the trading session has closed, the details of such 
a block trade must be reported to CX prior to the opening of business 
on the next succeeding day. CX will publicize information identifying 
the relevant contract, contract month, price and quantity for each 
block trade promptly after such information has been reported to CX.

III. Request for Comment

    The Commission requests comment from interested persons concerning 
any aspect of CX's proposed block trading procedures.
    Copies of CX's proposed new rules and rule amendments 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 September 30, 1999.
Alan L. Seifert,
Deputy Director.
[FR Doc. 99-26121 Filed 10-6-99; 8:45 am]
BILLING CODE 6351-01-M