[Federal Register Volume 65, Number 188 (Wednesday, September 27, 2000)]
[Notices]
[Pages 58051-58052]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-24825]


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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade's Proposal To Adopt Block Trading 
Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed new Chicago Board of Trade Regulation 331.05 
to establish block trading procedures and request for comment.

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SUMMARY: The Chicago Board of Trade (``CBOT'' or ``Exchange''), has 
submitted to the Commodity Futures Trading Commission (``Commission'') 
proposed new Regulation 331.05 that would establish block trading 
procedures at the Exchange. Under these procedures, eligible 
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 the Exchange for clearing and settlement. 
CBOT is seeking to allow block trading in those contract which the 
Exchange initially launches for trading on or after Decembe4r 31, 1999. 
CBOT's proposal would establish block trading procedures which in large 
part resemble block trading procedures which the Commission has 
approved for the Cantor Financial Futures Exchange and Chicago 
Mercantile Exchange.
    Acting pursuant to the authority delegated by Commission Regulation 
140.96(b), the Division of Trading and Markets (``Division'') has 
determined to publish CBOT'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 12, 2000.

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 ``Chicago Board of 
Trade's Proposal to Adopt Block Trading Procedures.''

FOR FURTHER INFORMATION CONTACT: Nicholas C. Milano, Attorney, Division 
of Trading and Markets, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155, 21 Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5361.

SUPPLEMENTARY INFORMATION:

I. Background

    On June 4, 1999, the Commodity Futures Trading Commission issued an 
Advisory on Alternate Execution, or Block Trading, Procedures for the 
Futures Industry.\1\ Through this Advisory, the Commission announced 
its intention to consider 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 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. Since that advisory, the 
Commission has approved block trading procedures at two contract 
markets--the Cantor Financial Futures Exchange on February 11, 2000 and 
the Chicago Mercantile Exchange on May 19, 2000.
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    \1\ 64 FR 31195 (June 10, 1999); 64 FR 34851 (corrections) (June 
29, 1999). 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 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 (``Act'') and the Commission's 
Regulations.
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    By letter dated August 31, 2000, CBOT submitted proposed Regulation 
331.05 to the Commission pursuant to section 5a(a)(12)(A) of the Act 
and Commission Regulation 1.41(c).\2\ Proposed Regulation 331.05 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 
had been agreed to, the counterparties would report the relevant 
details of the transaction to the Exchange 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 its CBOT/Eurex electronic trading system.
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    \2\ See Letter from Mr. Paul J. Draths, Vice President and 
Secretary, Chicago Board of Trade to Ms. Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, dated August 31, 2000.
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II. Description of CBOT's Proposed Block Trading Procedures

A. Eligible Contracts and Market Participants

    Under the proposed procedures, CBOT would limit the eligibility for 
block trading to those contracts that the Exchange initially launches 
for trading on or after December 31, 1999.\3\ CBOT's proposal would 
restrict block trading to those market participants that qualified as 
an ``eligible participant'' as that term is defined by Commission 
Regulation 36.1(c)(2). In connection with block trade transactions 
entered into by a commodity trading advisor (``CTA'') on behalf of its 
customers, and provided

[[Page 58052]]

that certain registration and financial conditions are satisfied, the 
CTA (and not its underlying customers) would be responsible for meeting 
the eligibility requirements described above. Accordingly, a CTA would 
be able to enter into such transactions on behalf of a customer without 
its customer having to qualify as an ``eligible participant'' under 
Commission Regulation 36.1 or without specifically authorizing the use 
of the block trading procedures.\4\
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    \3\ CBOT's proposal does not include the implementation of block 
trading or minimum size requirements for any particular contract. 
The Exchange represented that an initial contract designation has 
yet to be determined and, as such, would be submitted separately to 
the Commission.
    \4\ The CTA must be registered under Act (including without 
limitation any investment advisor registered as such with the 
Securities and Exchange Commission (``SEC'') that is exempt from 
regulation under the Act or the Commission's regulations) and have 
total assets under management exceeding $50 million.
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B. Size and Price Requirements

    Under proposed Regulation 331.05, each buy or sell order underlying 
a block trade must satisfy the applicable minimum size requirements as 
to be determined by the CBOT Board of Directors, case-by-case, for each 
particular contract eligible for block trading.\5\ The Exchange's 
proposed procedures require that the price of a block trade be ``fair 
and reasonable'' in light of: (1) The size of such block trade; (2) the 
price and size of other trades in the same contract at the relevant 
time; and (3) the price and size of trades in other relevant markets, 
including without limitation the underlying cash market or other 
related futures markets, at the relevant time. Moreover, the price at 
which a block trade was executed would not affect conditional orders 
and would not be used to establish settlement prices.
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    \5\ Generally, under CBOT's proposed block trading procedures, 
orders from different accounts could not be aggregated to satisfy 
the minimum size requirement. However, a CTA who was permitted to 
execute block trades on behalf of customers under CBOT Regulation 
331.05 would be permitted to aggregate orders from different 
accounts to satisfy the minimum size requirement.
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C. Transparency

    Each block trade executed in accordance with CBOT'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 the Exchange within 
five minutes immediately following its execution. For each block trade 
transaction, the Exchange would publish information that would identify 
the trade as such and would identify the relevant contract, contract 
month, price, and quantity.\6\ CBOT would disseminate such information 
immediately after the block trade had been reported to the Exchange.
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    \6\ In addition, each member and clearing member that was a 
party to a block trade must record the following information on its 
order ticket: that the trade was a block trade; the contract 
(including the delivery or expiry month) to which the block trade 
relates; the number of contracts traded; the execution price and 
time; identity of the counterparty; and, if applicable, details 
regarding the customer for which the block trade was executed.
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III. Request for Comment

    The Commission requests comment from interested persons concerning 
any aspect of CBOT's proposed block trading procedures.
    Copies of CBOT's proposed new Regulation 331.05 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 20, 2000.
Alan L. Seifert,
Deputy Director.
[FR Doc. 00-24825 Filed 9-26-00; 8:45 am]
BILLING CODE 6351-01-M