[Federal Register Volume 65, Number 199 (Friday, October 13, 2000)]
[Notices]
[Pages 60912-60913]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-26388]


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COMMODITY FUTURES TRADING COMMISSION


Application of onExchangeSM Board of Trade, Inc. for 
Designation as a Contract Market in Five Year U.S. Treasury Note 
Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of the terms and conditions of proposed 
commodity futures contracts.

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SUMMARY: OnExchangeSM Board of Trade, Inc. (``ONXBOT'' or 
``Exchange'') has applied for designation as a contract market for the 
automated trading of Five Year U.S. Treasury Note futures contracts on 
its electronic trading system, onTradeSM. The Exchange has 
not previously been approved by the Commodity Futures Trading 
Commission (``Commission'') as a contract market in any commodity. 
Accordingly, in addition to the terms and conditions of the proposed 
futures contract, ONXBOT has submitted to the Commission proposed 
bylaws and rules pertaining to ONXBOT membership, governance, trading 
standards, disciplinary and arbitration procedures, and various other 
materials necessary to meet the requirements for a board of trade 
seeking initial designation as a contract market, including a 
description of its trade-matching algorithm. ONXBOT's submission also 
includes various proposed bylaws and rules of the 
onExchangeSM Clearing Corporation (``ONXCC''), an affiliate 
that would be responsible for clearing and settlement functions for the 
Exchange.
    Acting pursuant to the authority delegated by Commission Regulation 
140.96, the Division of Economic Analysis and the Division of Trading 
and Markets (``the Divisions'') have determined to publish the 
Exchange's proposal for public comment. The Divisions believe that 
publication of the proposal for comment at this time is in the public 
interest, will assist the Commission in considering the views of 
interested persons, and is consistent with the Commodity Exchange Act. 
The Divisions seek comment pertaining to all aspects of ONXBOT's 
application and which address any issue commenters believe the 
Commission should consider.

DATES: Comments must be received on or before November 13, 2000.

FOR FURTHER INFORMATION CONTACT: With respect to questions about the 
terms and conditions of ONXBOT's proposed futures contract, please 
contact Thomas M. Leahy, Jr., Chief of Financial Instruments, Division 
of Economic Analysis, Commodity Futures Trading Commission, Three 
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581; telephone 
number (202) 418-5278; facsimile number (202) 418-5527; or electronic 
mail: [email protected]. With respect to ONXBOT's and ONXCC's other 
proposed rules, please contact Lois J. Gregory, Special Counsel, 
Division of Trading and Markets, at the same address, by telephone at 
(202) 418-5483, by facsimile at (202) 418-5536, or by electronic mail 
at [email protected]; or Joshua R. Marlow, Attorney-Advisor, Division 
of Trading and Markets, at the same address, by telephone at (202) 418-
5484, by facsimile at (202) 418-5536, or by electronic mail at 
[email protected].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

    By letters dated September 12, 2000 and September 27, 2000, ONXBOT, 
a subsidiary of onExchangeSM, Inc., has applied to the 
Commission for designation as a contract market for electronic trading 
of futures contracts in Five Year U.S. Treasury Notes. The Exchange has 
not previously been approved as a contract market in any commodity. 
Thus, in addition to the terms and conditions of the proposed futures 
contract, ONXBOT has submitted, among other things, proposed bylaws and 
rules pertaining to ONXBOT membership rights and obligations, 
governance, trading standards, and disciplinary and arbitration 
procedures, along with a description of its trading system's trade-
matching algorithm. ONXBOT's submission also includes various proposed 
ONXCC bylaws, rules, and procedures.
    ONXBOT is organized as a Delaware corporation with one class of 
shares. All shares in ONXBOT are currently held by 
onExchangeSM, Inc. OnExchangeSM, Inc. is majority 
owned by its officers, employees, and venture capital investment firms. 
Once operational, the Exchange would be governed by a Board of 
Directors (``ONXBOT Board''), which would include seven directors 
elected by the shareholders and two public directors appointed by the 
seven non-public directors. The ONXBOT Board would appoint a Chairman 
of the Board, President, Secretary, and Treasurer, and the President 
would be the chief executive officer of the Exchange. ONXCC would 
similarly be governed by a Board of Directors that, among other things, 
would appoint a President as chief executive officer of the company.\1\
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    \1\ ONXCC is organized as a Delaware non-stock, membership 
corporation with two classes of members. Class A members of ONXCC 
are entitled to elect and remove directors, and decide all matters 
which require a vote of the corporation's members. Only the holders 
of Class A shares would be entitled to receive any dividends or 
distributions that may be declared or paid by the corporation. 
OnExchangeSM, Inc. initially will be the sole Class A 
member. Class B members, comprised of all ONXBOT Subscribers, are 
not entitled to vote on any matter. ONXCC's Board would initially be 
comprised of three directors.
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    Trading privileges on ONXBOT would be limited to ONXBOT 
Subscribers, who would be required to qualify as Eligible Swap 
Participants under Commission Regulation 35.1(b)(2). Each Subscriber 
would be limited to trading for its own accounts, with no 
intermediation permitted. Subscribers could designate an unlimited 
number of Authorized Traders (``ATs'') to exercise discretion over 
their trading accounts, and would be responsible for supervising all 
activities of their ATs relating to transactions effected on the 
Exchange or subject to its rules. Each Subscriber would also be 
responsible for training and testing its ATs with respect to the proper 
use of the Exchange and its rules. Any violation of the rules and 
bylaws of the Exchange by any AT would be deemed a violation of the 
AT's Subscriber.

[[Page 60913]]

    ONXBOT contracts would trade over onTradeSM, an 
electronic trading system developed by onExchangeSM and 
accessed by Subscribers via the Internet.\2\ Under the proposal, orders 
could be entered into onTradeSM only by ONXBOT Subscribers 
and their ATs. OnTradeSM would accept orders for purchase or 
sale of futures contracts, combination trades, and calendar spreads. 
Orders would be required to include user identity (including Subscriber 
identity), intention to buy or sell, quantity, designation as a 
``market order'' or specification of a price limit, time period the 
order would remain open, and an activation price if designated as a 
stop order. Orders would be executed pursuant to a trade-matching 
algorithm that would give first priority to orders at the best prices, 
and then give priority among orders at the same price based upon time 
of entry into onTradeSM.\3\
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    \2\ The proposed trading hours for Five Year U.S. Treasury Note 
futures would be from 8:20 a.m. to 3:00 p.m. EST.
    \3\ Subject to this priority, orders for combination trades 
would be executed, and the legs thereof would be priced, pursuant to 
an algorithm that gives priority to execution of each leg of the 
transaction as a separate transaction rather than to execution of 
the transaction at a differential, if the prices for the legs of the 
transaction are better than, or equal to, the differential price.
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    ONXBOT also plans to permit Subscribers to execute block trades 
away from the trade matching system.\4\ Both parties to the transaction 
must request a Block Order Trade ID from the Exchange in advance and 
then submit identical orders to ONXBOT within 10 minutes of obtaining 
such ID. The price designated for the block trade must be ``fair and 
reasonable'' in light of, among other factors, market liquidity, size 
of the transaction, and current market prices (including the underlying 
cash market and other related futures markets). ONXBOT would publicize 
details of the transaction immediately after receipt of such 
information.
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    \4\ ONXBOT also would permit Subscribers to execute exchanges of 
futures for physicals and exchanges of futures for swaps.
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    All orders would be verified with ONXCC for sufficient margin 
assets prior to execution.\5\ Upon execution, transaction data would be 
instantaneously transmitted to onClearSM, ONXCC's automated 
clearing system. The transaction would clear immediately, and 
electronic confirmation notices would then be sent to both parties. 
ONXCC would have a settlement account at each ONXCC approved custody 
bank,\6\ and would maintain at least one subcustody account for each 
ONXBOT Subscriber at an approved custody bank,\7\ subject to the terms 
of an agreement between ONXCC and the custody bank.\8\ Subscribers 
would deposit margin assets in these accounts for purposes of original 
margin, delivery margin, and variation margin.\9\
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    \5\ OnExchangeSM, Inc. representatives have informed 
Commission staff that this margin asset verification process would 
take place within a fraction of a second before trade execution.
    \6\ ONXCC rules do not preclude custody agreements with more 
than one custody bank. Initially, ONXCC plans to have only one 
custody bank, but might enter into other custody bank relationships 
in the future, in which case it would establish a master settlement 
account for the purpose of netting pays and collects across 
settlement accounts.
    \7\ Subscribers are permitted to have more than one trading 
account and more than one subcustody account.
    \8\ Assets in subcustody accounts would be held by ONXCC, 
subject to Commission regulations requiring segregation of funds at 
clearing organizations.
    \9\ Original margin will consist of an amount no less than any 
assets necessary to cover three consecutive days of ``maximum price 
movement,'' as defined by each ONXBOT contract's terms and 
conditions.
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    In the event of Subscriber default, ONXCC would take control of the 
Subscriber's open positions and would be empowered by ONXCC rules to 
take steps to ensure minimum market disruption, including the closing 
out of open positions and liquidation of margin assets. If such 
proceeds would be insufficient to cover the default, ONXCC could meet 
the shortfall from a number of sources, including its guaranty fund 
which will initially consist of $10,000,000.\10\
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    \10\ The guaranty fund would increase, as necessary, to provide 
an amount equal to 1% of the aggregate original margin required to 
be maintained by Subscribers at ONXCC. At no time, however, would it 
drop below $10,000,000, regardless of the level of aggregate 
original margin, except when money from the fund has been applied to 
cover a Subscriber default. ONXCC would not have the power to impose 
assessments on non-defaulting Subscribers to cover shortfalls caused 
by the default of other Subscribers.
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    ONXBOT's provisions for compliance and surveillance programs would 
include market surveillance, trade practice surveillance, disciplinary 
functions, financial surveillance in cases where 
onExchangeSM is the Subscriber's designated self-regulatory 
organization, and arbitration. ONXBOT would secure an agreement with 
the National Futures Association to perform many of these functions. 
Investigations of any suspected violation of ONXBOT and ONXCC bylaws 
and rules by Subscribers or ATs would be presented to ONXBOT's Business 
Conduct Committee (``BCC''). If the BCC concludes that a violation may 
have occurred, it may authorize a settlement agreement, issue a warning 
letter, or direct the enforcement staff to institute disciplinary 
proceedings. Disciplinary proceedings would be conducted in front of a 
hearing panel drawn from the Exchange's Hearing Committee, whose 
decision may be appealed to the Board. ONXBOT rules also would permit 
summary proceedings against Subscribers and ATs for certain violations. 
ONXBOT rules do not contemplate fines as penalties. Penalties resulting 
from disciplinary action would only include suspension or termination.

II. Request for Comments

    Any person interested in submitting written data, views, or 
arguments on the proposal to designate ONXBOT as a contract market 
should submit their comments by the specified date to Jean A. Webb, 
Secretary, Commodity Futures Trading Commission, Three Lafayette 
Centre, 1155 21st Street, NW, Washington, DC 20581. In addition, 
comments may be sent via facsimile to (202) 418-5521, or by electronic 
mail to [email protected]. The Divisions seek comment on all aspects 
of ONXBOT's application for designation as a new contract market. 
Reference should be made to onExchangeSM Board of Trade's 
application for designation as a contract market in Five Year U.S. 
Treasury Note futures contracts. Copies of the proposed contract's 
terms and conditions, as well as the proposed trading rules, clearing 
rules, and other governing rules of ONXBOT and ONXCC, are available for 
inspection at the Office of the Secretariat, or may be obtained at the 
above address or by telephoning (202) 418-5100.
    Other materials submitted by ONXBOT may be available upon request 
pursuant to the Freedom of Information Act (5 U.S.C. 552), except to 
the extent that they are entitled to confidential treatment pursuant to 
17 CFR 145.5 or 145.9. Requests for copies of such materials should be 
made to the Freedom of Information, Privacy and Sunshine Act compliance 
staff of the Office of the Secretariat at Commission headquarters in 
accordance with 17 CFR 145.7, 145.8.

    Issued in Washington, DC, on October 10, 2000.
Alan L. Seifert,
Deputy Director.
[FR Doc. 00-26388 Filed 10-12-00; 8:45 am]
BILLING CODE 6351-01-P