[Federal Register Volume 65, Number 68 (Friday, April 7, 2000)]
[Notices]
[Pages 18312-18314]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-8604]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Mercantile Exchange's Proposal To Adopt Block Trading 
Procedures

AGENCY:  Commodity Futures Trading Commission.

ACTION:  Notice of proposed new Chicago Mercantile Exchange Rule 526 to 
establish block trading procedures and request for comment.

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SUMMARY:  The Chicago Mercantile Exchange (``CME'' or ``Exchange'') has 
submitted proposed new Rule 526 to the Commodity Futures Trading 
Commission (``Commission'') that would establish block trading 
procedures at the Exchange. 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 
have been agreed to, the counterparties would report the relevant 
details of the transaction to a designated Exchange official for 
clearing and settlement. The CME is seeking to allow block trading in 
its Five-Year and Ten-Year Agency Note futures contracts on a one-year 
pilot program basis. This proposal is the second 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 the CME'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 April 24, 2000.

ADDRESSES:  Comments should be submitted to Jean A. Webb, Secretary,

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Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. Comments also may be sent by 
facsimile (202) 418-5221 or by electronic mail to [email protected]. 
Reference should be made to the ``Chicago Mercantile 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 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 
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 executive 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 Transaction 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 executive 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, in September of 1999, the New 
York Board of Trade, on behalf of the Cantor Financial Futures 
Exchange, Inc. (``CX''), submitted proposed new rules and rule 
amendments to the Commission that would establish block trading 
procedures at the CX\2\ The CX proposal was the first contract market 
proposal to allow block trading that the Commission has received. On 
February 11, 2000, the Commission approved the CX's block trading 
proposal for its U.S. Treasury Bond, U.S. Treasury Ten-Year Note, 
Flexible Coupon U.S. Treasury Bond, and Flexible Coupon U.S. Treasury 
Ten-Year Note futures contracts on a one-year pilot program basis 
pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulations 
1.38 and 1.41(c).
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    \2\ The CX's block trading proposal was published in the Federal 
Register for public comment on October 7, 1999. 64 FR 54620.
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    By letters dated February 25, 2000, through March 23, 2000, the CME 
submitted proposed new Rule 526 to the Commission pursuant to Section 
5a(a)(12(A) of the Act and Commission Regulation 1.41(c). Proposed CME 
Rule 526 would establish block trading procedures at the Exchange 
whereby 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 have been agreed to, the counterparties would report 
the relevant details of the transaction to a designated Exchange 
official for clearing and settlement. Thus, under the proposed 
procedures, certain futures transactions could be executed 
noncompetitively rather than through the Exchange's open outcry trading 
platform or through its GLOBEX2 electronic trading system.

II. Description of the Proposed Block Trading Procedures

A. Eligible Contracts and Market Participants

    At the present time, the only contracts that would be eligible for 
the CME's proposed block trading procedures are its Five-year and Ten-
Year and Ten-Year Agency Note futures contracts.\3\ The CME is seeking 
to allow block trading in these contracts on a one-year pilot program 
basis. The CME could make additional contracts eligible for the block 
trading procedures subject to the approval of its Board of Directors 
(or a Committee appointed by the Board) and of the Commission.
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    \3\ The Commission approved the CME's application for 
designation as a contract market in the Five-Year and Ten Year 
Agency Note futures contracts on March 13, 2000. The current trading 
hours for these contracts are as follows: 7:20 a.m.-2 p.m. Central 
Time Monday through Friday for open outcry trading; 2:10 p.m.--7:05 
a.m. Central Time Monday through Thursday for GLOBEX2 trading; and 
5:30 p.m.--7:05 a.m. Central Time Sundays and holidays for GLOBEX2 
trading.
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    Proposed CME Rule 526 would restrict block trading to those market 
participants that qualify as an ``eligible participant'' as that term 
is defined by Commission regulation 36.1. In addition, each block order 
must include specific instructions that such order is to be executed 
pursuant to the proposed block trading procedures.
    In connection with block trades entered into by a commodity trading 
advisor (``CTA'') on behalf of its customers, and provided that certain 
registration and financial conditions are satisfied,\4\ The CTA (and 
not its underlying customers) would be responsible for meeting the 
eligibility requirements described above. Accordingly, the CTA would be 
able to enter into such transactions on behalf of customers without 
these customers having to qualify as ``eligible participants'' under 
Commission regulation 36.1 or to specifically authorize the use of the 
block trading procedures.
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    \4\ The CTA must be registered under the Act (which includes 
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.
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B. Size and Price Requirements

    Under proposed CME Rule 526, each buy or sell order underlying a 
block trade must satisfy the applicable minimum size requirement as 
determined by the CME's Board of Directors or by a Committee appointed 
by the Board. In the case of the CME's Five-year and Ten-Year Agency 
Note futures contracts, the minimum threshold will be 200 contracts.\5\
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    \5\ In connection with block trades entered into by a CTA (which 
satisfies certain registration and financial conditions) on behalf 
of its customers, the underlying customer orders do not have to 
satisfy the minimum threshold requirement. Accordingly, a CTA 
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 or 
the Commission's regulations) with total assets under management 
exceeding $50 million may aggregate orders from different accounts 
to satisfy the minimum size requirement.
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    The price at which a block trade is executed must be ``fair and 
reasonable'' in light of the following factors: (1) The size of such 
block trade; (2) the prices and sizes of other transactions in the same 
contract at the relevant time; (3) the prices and sizes of transactions 
in other relevant markets; including the underlying cash and futures 
markets, at the relevant time; and (4) the circumstances of the parties 
to the block trade.

C. Transparency

    Each block trade must be reported to a designated Exchange within 
five minutes of the time of execution. \6\ Such

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report must include information identifying the relevant contract, 
contract month, price, and quantity of the transaction. In addition, 
clearing firms must report each block trade to the Exchange Clearing 
House--including the time of execution--in accordance with the Clearing 
House Manual of Operations. The CME will immediately publicize block 
trade information separately from the reports of transactions in the 
regular, competitive market.
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    \6\ Completed block transactions may be reported to the Exchange 
in one of two ways: (1) through telephone to the Exchange's GLOBEX 
Control Center from 5:30 p.m. Central Time on Sunday through 2:00 
p.m. Central time on Friday; and (2) through select price reporting 
terminals available on the Exchange floor during Regular Trading 
Hours (7:30 a.m.--2:00 p.m. Central Time) Monday through Friday.
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III. Request for Comment

    The Commission request comment from interested persons concerning 
any aspects of the CME's proposed block trading procedures.
    Copies of the CME's proposed new Rule 526 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 April 3, 2000.
John C. Lawton,
Acting Director.
[FR Doc. 00-8604 Filed 4-6-00; 8:45 am]
BILLING CODE 6351-01-M