[Federal Register Volume 65, Number 21 (Tuesday, February 1, 2000)]
[Notices]
[Pages 4807-4808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1907]


-----------------------------------------------------------------------

COMMODITY FUTURES TRADING COMMISSION

RIN 3038-ZA08


Average Price Calculations by Futures Commission Merchants

AGENCY:  Commodity Futures Trading Commission.

ACTION:  Advisory.

-----------------------------------------------------------------------

SUMMARY:  The Commodity Futures Trading Commission (``Commission'') is 
issuing guidance concerning the circumstances in which a futures 
commission merchant (``FCM'') may calculate for and confirm to its 
customers an average price when multiple prices are received on an 
order or series of orders. The Commission has determined that if 
prerequisite conditions specified in this advisory are met, an FCM may 
calculate an average price for its affected customers whether the 
contracts involved are traded on domestic or non-domestic exchanges.

EFFECTIVE DATE:  February 1, 2000.

FOR FURTHER INFORMATION CONTACT:  David Taylor, (202) 418-5488.

ADVISORY:

I. Introduction and Background

    On September 15, 1999, the Commodity Futures Trading Commission 
(``CFTC'' or ``Commission'') Division of Trading and Markets 
(``Division'') received a written request from the Futures Industry 
Association (``FHA'') Law and Compliance Division for guidance from the 
Commission regarding whether a futures commission merchant (``FCM'') 
may calculate an average price for its customers in situations when 
multiple prices are received on an order or series of orders involving 
contracts traded on domestic as well as non-domestic exchanges.
    The CFTC has permitted the use of average prices in the futures 
industry since 1992. On April 10, 1992, the

[[Page 4808]]

Division permitted the Chicago Mercantile Exchange (``CME'') to make 
effective without Commission approval CME Rule 553, which enabled an 
FCM to confirm to its customers an average price calculated by the 
Exchange when multiple prices were received on an order or series of 
orders for the FCM's customers. On June 10, 1992, the Division 
permitted the Chicago Board of Trade (``CBI'') to make effective 
without Commission approval a similar average price order provision 
(CBT Rule 421.03). Under these rules, a domestic exchange has been 
responsible for calculating the average prices for contracts executed 
on that exchange, and the FCM involved has confirmed these prices to 
the appropriate customers.
    On May 26, 1995, the Division issued a non-action letter (``No-
Action Letter'') that permits an FCM to calculate and confirm average 
prices to its customers for trades executed on non-domestic exchanges 
(CFTC No-Action Letter No. 95-59, CCH Comm. Fut. L. Rep. para. 26,434, 
1995 WL 389299 (C.F.T.C)). Where non-domestic exchanges are involved, 
the No-Action Letter permits the FCM itself, subject to certain 
conditions, to calculate the average price and then confirm it to its 
customers.
    Certain FCMs have recently expressed an interest in having the 
flexibility to calculate average prices for contracts executed on both 
domestic and non-domestic exchanges. Although some FCMs will still 
prefer to use the exchange calculations, other FCMs have developed the 
necessary systems to support the average price calculations for 
contracts executed on non-domestic exchanges. These FCMs would prefer 
to apply their systems for all contracts for which average price 
calculations would be appropriate.\1\ These firms have indicated that 
this flexibility would increase efficiencies by allowing them to apply 
a consistent operational function for average pricing on both domestic 
and non-domestic exchanges.
---------------------------------------------------------------------------

    \1\ As specified in current exchange rules regarding average 
pricing, an order or series of orders executed during a Regular 
Trading Hours Session or matched during an electronic trading 
session at more than one price may be averaged if each order is for 
the same account or group of accounts and for the same commodity and 
month for futures, or for the same commodity, month, put/call and 
strike price for options. APS treatment may apply to multiple 
accounts that are part of a managed account program or other common 
investment program, or to individual discretionary accounts. It may 
also be applied to individual non-discretionary accounts, but prices 
for one of these accounts may not be averaged with those of other 
non-discretionary accounts.
---------------------------------------------------------------------------

II. Prerequisite Conditions for FCM Calculation of Average Prices

    The Commission believes that it would be acceptable to allow 
flexibility for FCMs to calculate and confirm average prices involving 
contracts traded on domestic as well as non-domestic exchanges, 
provided that certain prerequisite conditions were met. The applicable 
conditions would be as follows:
    1. The customer has requested average price reporting.\2\
---------------------------------------------------------------------------

    \2\ Under Commission Regulation 1.35(a-1) and Appendix C [para. 
2211C], it will continue to be impermissible to bunch an order of a 
customer who has not requested average pricing with other orders in 
a bunched order for which the specified allocation designator or 
allocation method is average pricing.
---------------------------------------------------------------------------

    2. Average price reporting in accordance with this Advisory is 
permitted under the rules of the domestic exchange involved or not 
prohibited under the rules of the foreign exchange involved.
    3. Each individual trade is submitted and cleared by the relevant 
clearing organization at the executed price.
    4. The FCM calculates and confirms to its customers the weighted 
mathematical average price.\3\
---------------------------------------------------------------------------

    \3\ As currently required for average price calculations made by 
exchanges, the weighted mathematical average price is to be computed 
by: (a) multiplying the number of contracts purchased or sold at 
each execution price by that price, (b) adding the results together, 
and (c) dividing by the total number of contracts. For a series of 
orders, the average price may be computed based on the average price 
of each order in that series. As in current practice, FCMs are 
permitted to confirm to customers either the actual average price or 
the average price rounded to the next price increment. In the latter 
case, the FCM must round the average price up to the next price 
increment for a buy order or down to the next price increment for a 
sell order, and pay any residual thus created to the customer, thus 
placing that customer in the same position as if the actual average 
price had been confirmed to him or her. APS calculations can produce 
prices that do not conform to whole cent increments, and in such 
cases amounts less than one cent may be retained by the FCM. 
Although disclosure to customers concerning how average prices are 
calculated was required when use of average prices was first 
permitted in 1992 as noted above, FIA has represented to the 
Commission that such disclosures are no longer needed because 
average pricing has become familiar to futures industry customers. 
Accordingly, the Commission will no longer require an FCM to provide 
such disclosures to its customers, but notes that an FCM should 
provide such information upon a customer's request.
---------------------------------------------------------------------------

    5. The FCM possess the records to support the calculations and the 
allocations to customer accounts, maintains them in accounts, maintains 
them in accordance with Commission Regulation 1.31, and makes them 
available for inspection by affected customers on request.
    6. The FCM identifies each trade to which an average price is 
assigned as having an average price on each confirmation statement and 
monthly statement on which the trade is reported to the customer 
pursuant to Commission Regulation 1.33.\4\
---------------------------------------------------------------------------

    \4\ Where an FCM makes it own average price calculations as set 
forth above, the FCM will no longer be required to indicate average 
price treatment on order tickets or electronic trading system 
entries, since in that event the clearing house will no longer be 
involved, and since the simple arithmetic calculation of an average 
price does not implicate any on-floor or electronic trading system 
trade practice.
---------------------------------------------------------------------------

    7. The FCM's proprietary trades are not averaged with customer 
trades subject to average price calculations.\5\
---------------------------------------------------------------------------

    \5\ In situations where the FCM participates on its own behalf 
in a collective vehicle such as a hedge fund, and trades of the 
collective vehicle are included in average pricing involving 
customers of the FCM, the Commission will not regard the FCM as 
having violated the prohibition on averaging proprietary trades with 
customer trades so long as the FCM owns less than 10% of the 
collective vehicle (see Commission Regulation 1.3(y)).
---------------------------------------------------------------------------

    The Commission believes that these conditions provide reasonable 
safeguards that support permitting an FCM to perform average price 
calculations. The Commission further believes that these conditions 
should be applied consistently for the calculation of trades executed 
on both domestic and non-domestic exchanges.

III. Conclusion

    Average prices have been in use for several years and in certain 
instances can be more informative and understandable to customers than 
providing different and multiple prices. Permitting FCMs to calculate 
and confirm average prices to customers effectively permits alternative 
operational procedures to achieve the same results. It also furthers 
the Commission's stated goal of reducing the regulatory burden on the 
domestic futures industry, in order to permit it to compete freely in 
the global futures marketplace, whenever this can be done without 
undermining the purposes of and the safeguards provided by the 
Commodity Exchange Act and the Commission's regulations.
    Accordingly, the Commission has determined that where all of the 
prerequisite conditions specified above are met, FCMs may, if they 
choose, calculate average prices for and confirm average prices to 
their affected customers, whether the contracts involved are executed 
on domestic or non-domestic exchanges.

    Issued in Washington, D.C., on January 20, 2000 by the 
Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-1907 Filed 1-31-00; 8:45 am]
BILLING CODE-6351-01-M