[Federal Register Volume 70, Number 131 (Monday, July 11, 2005)]
[Notices]
[Pages 39814-39820]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3617]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51958; File No. SR-CME-2005-02]


Self-Regulatory Organization; Chicago Mercantile Exchange; Notice 
of Filing and Immediate Effectiveness of Proposed Rules Governing 
Security Futures Adjustments

June 30, 2005.
    Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-7 thereunder,\2\ notice is hereby given that 
on May 4, 2005, the Chicago Mercantile Exchange (``CME'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change described in Items I, II, and 
III below, which Items have been prepared by the Exchange.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
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    CME has also certified the proposed rule change with the Commodity 
Futures Trading Commission (``CFTC'') under Section 5c(c) of the 
Commodity

[[Page 39815]]

Exchange Act (``CEA'') \3\ on May 4, 2005. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \3\ 7 U.S.C. 7a-(c).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CME proposes to adopt rules governing Security Futures Product 
Adjustments for purposes of Section 6(h) of the Act.\4\ Proposed new 
language is italicized.
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    \4\ 15 U.S.C. 78f(h).
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CHAPTER 701: SECURITY FUTURES PRODUCTS ADJUSTMENTS

70101. SCOPE OF CHAPTER

    This chapter is limited in application to Security Futures Products 
(``SFPs'') traded on Chicago Mercantile Exchange where the underlying 
interest is a single equity security or a narrow-based index. The 
procedures for clearing, delivery, settlement and other matters not 
specifically covered herein shall be governed by the Rules of the 
Exchange.

70110. ADJUSTMENTS TO SECURITY FUTURES PRODUCTS

    1. Determinations as to whether and how to adjust the terms of 
Security Futures Products to reflect events affecting underlying 
interests shall be made by the Clearing House based on its judgment as 
to what is appropriate for the protection of investors and the public 
interest, taking into account such factors as fairness to the buyers 
and sellers of Security Futures Products on the underlying interest, 
the maintenance of a fair and orderly market in futures on the 
underlying interest, consistency of interpretation and practice, 
efficiency of settlement of delivery obligations arising from 
physically-settled Security Futures Products, and the coordination with 
other clearing agencies of the clearance and settlement of transactions 
in the underlying security. The Clearing House may, in addition to 
determining adjustments to Security Futures Products on a case-by-case 
basis, adopt interpretations having general application to specified 
types of events. Every determination by the Clearing House in respect 
of Security Futures Products pursuant to this Rule shall be within the 
discretion of the Clearing House and shall be conclusive and binding on 
all investors and not subject to review. The following paragraphs of 
this Rule apply to Security Futures Products based on single equity 
securities only.
    2. Whenever there is a dividend, stock dividend, stock 
distribution, stock split, reverse stock split, rights offering, 
distribution, reorganization, recapitalization, reclassification or 
similar event in respect of any underlying security, or a merger, 
consolidation, dissolution or liquidation of the issuer of any 
underlying security, the number of Security Futures Product contracts, 
the unit of trading, the settlement price and the underlying security, 
or any of them, with respect to all outstanding Security Futures 
Products open for trading in the underlying security may be adjusted in 
accordance with this Rule. If the Clearing House does not learn, or 
does not learn in a timely manner, of an event for which the Clearing 
House would have otherwise made an adjustment, the Clearing House shall 
not be liable for any failure to make such adjustment or delay in 
making such adjustment. In making any adjustment determination, the 
Clearing House shall apply the factors set forth in this Rule in light 
of the circumstances known to it at the time such determination is 
made.
    3. It shall be the general rule that there will be no adjustments 
to reflect ordinary cash dividends or distributions or ordinary stock 
dividends or distributions (collectively, ``ordinary distributions'') 
by the issuer of the underlying security.
    4. Subject to paragraph 3 of this Rule, it shall be the general 
rule that in the case of a stock dividend, stock distribution or stock 
split whereby one or more whole numbers of shares of the underlying 
security are issued with respect to each outstanding share, each SFP 
contract covering that underlying security shall be increased by the 
same number of additional SFP contracts as the number of shares issued 
with respect to each share of the underlying security, the last 
settlement price established immediately before such event shall be 
proportionately reduced, and the unit of trading shall remain the same.
    5. Subject to paragraph 3 of this Rule, it shall be the general 
rule that in the case of a stock dividend, stock distribution or stock 
split whereby other than a whole number of shares of the underlying 
security is issued in respect of each outstanding share, the last 
settlement price established immediately before such event shall be 
proportionately reduced, and conversely, in the case of a reverse stock 
split or combination of shares, the last settlement price established 
immediately before such event shall be proportionately increased. 
Whenever the settlement price with respect to a stock future has been 
reduced or increased in accordance with this paragraph, the unit of 
trading shall be proportionately increased or reduced, as the case may 
be.
    6. It shall be the general rule that in the case of any 
distribution made with respect to shares of an underlying security, 
other than ordinary distributions and other than distributions for 
which adjustments are provided in paragraphs 4 or 5 of this Rule, if 
the Clearing House determines that an adjustment to the terms of 
Security Futures Products on such underlying security is appropriate, 
(a) the last settlement price established immediately before such event 
shall be reduced by the value per share of the distributed property, in 
which event the unit of trading shall not be adjusted, or 
alternatively, (b) the unit of trading in effect immediately before 
such event shall be adjusted so as to include the amount of property 
distributed with respect to the number of shares of the underlying 
security represented by the unit of trading in effect prior to such 
adjustment, in which event the settlement price shall not be adjusted. 
The Clearing House shall, with respect to adjustments under this 
paragraph or any other paragraph of this Rule, have the authority to 
determine the value of distributed property.
    7. In the case of any event for which adjustment is not provided in 
any of the foregoing paragraphs of this Rule, the Clearing House may 
make such adjustments, if any, with respect to the Security Futures 
Products affected by such event as the Clearing House determines.
    8. Adjustments pursuant to this Rule shall as a general rule become 
effective in respect of outstanding Security Futures Products on the 
``ex-date'' established by the primary market for the underlying 
security.
    9. It shall be the general rule that (a) all adjustments of the 
settlement price of an outstanding stock future shall be rounded to the 
nearest adjustment increment, (b) when an adjustment causes a 
settlement price to be equidistant between two adjustment increments, 
the settlement price shall be rounded up to the next highest adjustment 
increment, (c) all adjustments of the unit of trading shall be rounded 
down to eliminate any fraction, and (d) if the unit of trading is 
rounded down to eliminate a fraction, the adjusted settlement price 
shall be further adjusted, to the nearest adjustment increment, to 
reflect any diminution in the value of the stock

[[Page 39816]]

future resulting from the elimination of the fraction.
    10. Notwithstanding the general rules set forth in paragraphs 3 
through 9 of this Rule or which may be set forth as interpretations to 
this Rule, the Clearing House shall have the power to make exceptions 
in those cases or groups of cases in which, in applying the standards 
set forth in paragraph 1 of this Rule, the Clearing House shall 
determine such exceptions to be appropriate. However, the general rules 
shall be applied unless the Clearing House affirmatively determines to 
make an exception in a particular case or group of cases.

INTERPRETATION TO RULE 70110

ADJUSTMENTS TO SECURITY FUTURES PRODUCTS

    1. (a) Cash dividends or distributions by the issuer of the 
underlying security that the Clearing House believes to have been 
declared pursuant to a policy or practice of paying such dividends or 
distributions on a quarterly or other regular basis, will, as a general 
rule, be deemed to be ``ordinary distributions'' within the meaning of 
paragraph 3 of this Rule. The Clearing House will determine on a case-
by-case basis whether other dividends or distributions are ``ordinary 
distributions'' or whether they are dividends or distributions for 
which an adjustment should be made. (b) Stock dividends or 
distributions by the issuer of the underlying security that the 
Clearing House believes to have been declared pursuant to a policy or 
practice of paying such dividends or distributions on a quarterly basis 
will, as a general rule, be deemed to be ``ordinary distributions'' 
within the meaning of paragraph 3 of this Rule. The Clearing House will 
ordinarily adjust for other stock dividends and distributions. (c) 
Where the Clearing House determines to adjust for a cash or stock 
dividend or distribution, the adjustment shall be made in accordance 
with the applicable provisions of this Rule.
    2. Adjustments will ordinarily be made for rights distributions, 
except as provided below in the case of certain ``poison pill'' rights. 
When an adjustment is made for a rights distribution, the unit of 
trading in effect immediately prior to the distribution will ordinarily 
be adjusted to include the number of rights distributed with respect to 
the number of shares or other units of the underlying security 
comprising the unit of trading. If, however, the Clearing House 
determines that the rights are due to expire before the time they could 
be exercised upon delivery under the futures contract, then delivery of 
the rights will not be required. Instead, the Clearing House will 
ordinarily adjust the last settlement price established before the 
rights expire to reflect the value, if any, of the rights as determined 
by the Clearing House in its sole discretion. Adjustments will not 
ordinarily be made to reflect the issuance of so-called ``poison pill'' 
rights that are not immediately exercisable, trade as a unit or 
automatically with the underlying security, and may be redeemed by the 
issuer. In the event such rights become exercisable, being to trade 
separately from the underlying security, or are redeemed, the Clearing 
House will determine whether an adjustment is appropriate.
    3. Adjustments will not be made to reflect a tender offer or 
exchange offer to the holders of the underlying security, whether such 
offer is made by the issuer of the underlying security or by a third 
person or whether the offer is for cash, securities or other property. 
This policy will apply without regard to whether the price of the 
underlying security may be favorably or adversely affected by the offer 
or whether the offer may be deemed to be ``coercive.'' Outstanding 
Security Futures Products ordinarily will be adjusted to reflect a 
merger, consolidation or similar event that becomes effective following 
the completion of a tender offer or exchange offer.
    4. Adjustments will not be made to reflect changes in the capital 
structure of an issuer where all of the underlying securities 
outstanding in the hands of the public (other than dissenters' shares) 
are not changed into another security, cash or other property. For 
example, adjustments will not be made merely to reflect the issuance 
(except as a distribution on an underlying security) of new or 
additional debt, stock, or options, warrants or other securities 
convertible into or exercisable for the underlying security, the 
refinancing of the issuer's outstanding debt, the repurchase by the 
issuer of less than all of the underlying securities outstanding, or 
the sale by the issuer of significant capital assets.
    5. When an underlying security is converted into a right to receive 
a fixed amount of cash, such as in a merger, outstanding Security 
Futures Products will be adjusted to replace such underlying security 
with such fixed amount of cash as the underlying interest, and the unit 
of trading shall remain unchanged.
    6. In the case of a corporate reorganization, reincorporation or 
similar occurrence by the issuer of an underlying security which 
results in an automatic share-for-share exchange of shares in the 
issuer for shares in the resulting company, Security Futures Products 
on the underlying security will ordinarily be adjusted by replacing 
such underlying security with a like number of units of the shares of 
the resulting company. Because the securities are generally exchanged 
only on the books of the issuer and the resulting company, and are not 
generally exchanged physically, deliverable shares will ordinarily 
include certificates that are denominated on their face as shares in 
the original issuer, but which, as a result of the corporate 
transaction, represent shares in the resulting company.
    7. When an underlying security is converted in whole or in part 
into a debt security and/or a preferred stock, as in a merger, and 
interest or dividends on such debt security or preferred stock are 
payable in the form of additional units thereof, outstanding Security 
Futures Products that have been adjusted by replacing the original 
underlying security with the security into which the original 
underlying security has been converted shall be further adjusted, 
effective as of the ex-date for each payment of interest or dividends 
thereon, by increasing the unit of trading by the number of units of 
the new underlying security distributed as interest or dividends 
thereon.
    8. Notwithstanding this Interpretation of Rule 70110, distributions 
of short-term and long-term capital gains in respect of stock fund 
shares by the issuer thereof shall not, as a general rule, be deemed to 
be ``ordinary dividends or distributions'' within the meaning of 
paragraph 3 of Rule 70110, and adjustments of the terms of Security 
Futures Products on such stock fund shares for such distributions shall 
be made in accordance with applicable provisions of Rule 70110, unless 
the Clearing House determines, on a case-by-case basis, not to adjust 
for such a distribution.
    9. In the event that a new series of Security Futures Products is 
introduced with a settlement price expressed in decimals and there is 
an outstanding series of Security Futures Products on the same 
underlying security with a settlement price expressed as a fraction 
that could be expressed in whole cents, the Clearing House may restate 
the settlement price of the outstanding series as its equivalent 
decimal price. If the settlement price for the outstanding series is a 
fraction that cannot be expressed in whole cents, the settlement price 
may not be restated as a decimal.

[[Page 39817]]

70120. UNAVAILABILITY OR INACCURACY OF FINAL SETTLEMENT PRICE

    1. If the Clearing House shall determine that the primary market(s) 
for the underlying security in respect of a maturing stock future did 
not open or remain open for trading at or before the time when the 
final settlement price for such futures would ordinarily be determined, 
or that the price or other value used to determine the final settlement 
price is unreported or otherwise unavailable, then, in addition to any 
other actions that the Clearing House may be entitled to take under the 
Rules, the Clearing House shall be empowered to do any or all of the 
following with respect to maturing futures affected by such event 
(``affected futures''):
    (a) The Clearing House may suspend the time for making the final 
variation payment with respect to affected futures and, in the case of 
physically-settled Security Futures Products, may postpone the delivery 
date. At such time as the Clearing House determines that the required 
price or other value is available or the Clearing House has fixed the 
final settlement price pursuant to subparagraph (a) or (b) of this 
Rule, the Clearing House shall fix a new date for making the final 
variation payment and may fix a new delivery date for physically-
settled Security Futures Products.
    (b) The Clearing House may fix the final settlement price for 
affected futures, based on its judgment as to what is appropriate for 
the protection of investors and the public interest, taking into 
account such factors as fairness to buyers and sellers of affected 
futures, the maintenance of a fair and orderly market in such futures, 
and consistency of interpretation and practice. Without limiting the 
generality of the foregoing, the Clearing House may, if it deems such 
action appropriate for the protection of investors and the public 
interest, fix the final settlement price on the basis of the reported 
price of the underlying security or reported level of the underlying 
index at the close of regular trading hours (as determined by the 
Clearing House) on the last preceding trading day for which a closing 
stock price or index level was reported by the reporting authority.
    2. The Clearing House may fix the final settlement price for 
affected futures using the opening prices of the relevant security or 
securities when the primary market(s) reopen. In that case, the date 
for making the final variation payment for the affected futures shall 
be postponed until the business day next following the day on which the 
final settlement price is fixed; and, in the case of physically-settled 
Security Futures Products, the delivery date shall also be postponed 
accordingly.
    3. Every determination of the Clearing House pursuant to this 
Section shall be within the discretion of the Clearing House and shall 
be conclusive and binding on all investors and not subject to review. 
Unless the Clearing House directs otherwise, the price of an underlying 
security and the current index value of an underlying index as 
initially reported by the relevant reporting authority shall be 
conclusively presumed to be accurate and shall be deemed final for the 
purpose of determining settlement prices and the final settlement 
price, even if such price or value is subsequently revised or 
determined to have been inaccurate.

INTERPRETATION TO 70120. UNAVAILABILITY OR INACCURACY OF FINAL 
SETTLEMENT PRICE

    The Clearing House will not adjust officially reported stock prices 
for final settlement purposes, even if those prices or values are 
subsequently found to have been erroneous, except in extraordinary 
circumstances. Such circumstances might be found to exist where, for 
example, the closing price or current index value as initially reported 
is clearly erroneous and inconsistent with prices or values reported 
earlier in the same trading day, and a corrected closing price or 
current index value is promptly announced by the reporting authority. 
In no event will a completed settlement be adjusted due to errors in 
officially reported stock prices or current index values.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
Sections A, B, and C below, of the most significant aspects or such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposed to adopt CME Chapter 702, Security Futures 
Product Adjustments. The proposed CME Chapter 702 specifies the 
Exchange's response to corporate events and the possible unavailability 
or inaccuracy of spot values for use as final settlement prices. The 
Exchange believes that these rules are substantially identical to rules 
currently deployed by the Options Clearing Corporation (``OCC'') with 
respect to the maintenance and bookkeeping of security futures products 
(``SFPs'') and to the provisions of CME Chapter 8B.\5\
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    \5\ CME Chapter 8B addresses procedures applied to SFPs effected 
on a marketplace apart from CME but cleared by CME Clearing House.
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Section 6(h)(3) of the Act Requirements
    Section 6(h)(3) of the Act \6\ contains listing standards and 
conditions for trading SFPs. Below is a summary of each such 
requirement or condition, followed by a brief explanation of how CME 
would comply with it, whether by particular provisions in CME Listing 
Standards or otherwise.
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    \6\ 15 U.S.C. 78f(h)(3).
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    Clause (A) of Section 6(h)(3) of the Act \7\ requires that any 
security underlying a SFP be registered pursuant to Section 12 of the 
Act.\8\ This requirement is addressed by CME Rules 70001.2, 70003.2.b, 
70004.2.a, and proposed CME Rule 70002.1.a.
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    \7\ 15 U.S.C. 78f(h)(3)(A).
    \8\ 15 U.S.C. 78l.
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    Clause (B) of Section 6(h)(3) of the Act \9\ requires that a market 
on which a physically settled SFP is traded have arrangements in place 
with a registered clearing agency for the payment and delivery of the 
securities underlying the SFP. CME has reached an agreement with a 
participant of DTC, a registered clearing agency, to facilitate the 
delivery-versus-payment transactions which result from an agreement to 
make or take delivery of the underlying security by the market 
participant.\10\ This DTC participant would provide CME with a 
dedicated DTC account. This account would be a sub-account of the 
participant's main account and would be utilized solely for CME

[[Page 39818]]

activity with respect to the delivery of, and payment for, securities 
delivered against CME SFPs. CME would act as a contra party to each 
delivery transaction. The CME Clearing House would submit a delivery 
instruction for each transaction to DTC by electronic interface 
provided by the DTC participant. Market participants would be required 
to provide proof to CME outlining their operational and legal ability 
to make or take delivery of the underlying securities. These agreements 
and relevant procedures would be fully operational prior to any 
possible delivery event associated with such SFPs.
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    \9\ 15 U.S.C. 78f(h)(3)(B).
    \10\ The Exchange clarified its arrangement for the payment and 
delivery of securities underlying the SFPs. Telephone conversation 
between John Labuszewski, Managing Director, CME, and Florence E. 
Harmon, Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, on June 9, 2005.
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    Clause (C) of Section 6(h)(3) of the Act \11\ provides that listing 
standards for SFPs must be no less restrictive than comparable listing 
standards for options traded on a national securities exchange or 
national securities association registered pursuant to Section 15A(a) 
of the Act.\12\ For the reasons discussed herein, notwithstanding 
specified differences between the Sample Listing Standards and CME 
Listing Standards, CME believes that the latter are no less restrictive 
than comparable listing standards for exchange-traded options.
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    \11\ 15 U.S.C. 78f(h)(3)(C).
    \12\ 15 U.S.C. 78o-3(a).
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    Clause (D) of Section 6(h)(3) of the Act \13\ requires that each 
SFP be based on common stock or such other equity securities as the 
Commission and CFTC jointly determine are appropriate. This requirement 
is addressed by CME Rules 70001.1, 70002.1., 70003.2., and 70004.2.
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    \13\ 5 U.S.C. 78f(h)(3)(D).
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    Clause (E) of Section 6(h)(3) of the Act \14\ requires that each 
SFP be cleared by a clearing agency that has in place provisions for 
linked and coordinated clearing with other clearing agencies that clear 
SFPs, which permits the SFPs to be purchased on one market and offset 
on another market that trades such product. CME proposes to clear SFPs 
traded through Exchange facilities through CME Clearing House. CME 
Clearing House would have in place all provisions for linked and 
coordinated clearing as mandated by law and statute as of the effective 
date of such laws and statutes.
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    \14\ 15 U.S.C. 78f(h)(3)(E).
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    Clause (F) of Section 6(h)(3) of the Act \15\ requires that only a 
broker or dealer subject to suitability rules comparable to those of a 
national securities association registered pursuant to Section 15A(a) 
of the Act \16\ effect transactions in a SFP. CME clearing members and 
their correspondents are bound by the applicable sales practice rules 
of the National Futures Association (``NFA''), which is a national 
securities association. As such, the sales practice rules of NFA are, 
perforce, comparable to those of a national securities association 
registered pursuant to Section 15A(a) of the Act.\17\ Moreover, the 
application of NFA sales practice rules is extended beyond the CME 
clearing membership to the extent that NFA By-Law 1101 provides that 
``[n]o member may carry an account, accept an order or handle a 
transaction in commodity futures contracts for or on behalf of any non-
Member of NFA.''
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    \15\ 15 U.S.C. 78f(h)(3)(F).
    \16\ 15 U.S.C. 78o-3(a).
    \17\ 15 U.S.C. 78o-3(a).
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    Clause (G) of Section 6(h)(3) of the Act \18\ requires that each 
SFP be subject to the prohibition against dual trading in Section 4j of 
CEA \19\ and the rules and regulations thereunder or the provisions of 
Section 11(a) of the Act \20\ and the rules and regulations thereunder. 
CME Rule 123 requires Exchange members to comply with all applicable 
``provisions of the Commodity Exchange Act and regulations duly issued 
pursuant thereto by the CFTC.''
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    \18\ 15 U.S.C. 78f(h)(3)(G).
    \19\ 15 U.S.C. 6j.
    \20\ 15 U.S.C. 78k(a).
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    Further, the prohibition of dual trading in SFPs per Regulation 
Sec.  41.27 \21\ adopted pursuant to Section 4j(a) of CEA \22\ applies 
to a contract market operating an electronic trading system if such 
market provides participants with a time or place advantage or the 
ability to override a predetermined matching algorithm. The Exchange 
intends to offer SFPs on CME exclusively on its CME Globex electronic 
trading platform. To the extent that the conditions cited above do not 
exist in the context of the CME Globex system, the CME Rulebook 
contains no specific rule relating to dual trading in an electronic 
forum.
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    \21\ 17 CFR 41.27.
    \22\ 7 U.S.C. 4j(a).
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    Clause (H) of Section 6(h)(3) of the Act \23\ provides that trading 
in a SFP must not be readily susceptible to manipulation of the price 
of such SFP, nor to causing or being used in the manipulation of the 
price of any underlying security, option on such security, or option on 
a group or index including such securities. CME believes that CME 
Listing Standards are designed to ensure that CME SFPs and the 
underlying securities would not be readily susceptible to price 
manipulation. Under CME Rule 432, an activity ``to manipulate prices or 
to attempt to manipulate prices'' is a ``major offense'' punishable, 
per CME Rule 430, by ``expulsion, suspension, and/or a fine of not more 
than $1,000,000 plus the monetary value of any benefit received as a 
result of the violative action.''
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    \23\ 15 U.S.C. 78f(h)(3)(H).
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    Clause (I) of Section 6(h)(3) of the Act \24\ requires that 
procedures be in place for coordinated surveillance amongst the market 
on which a SFP is traded, any market on which any security underlying 
the SFP is traded, and other markets on which any related security is 
traded to detect manipulation and insider trading. The Exchange has 
surveillance procedures in place to detect manipulation on a 
coordinated basis with other markets. In particular, CME is an 
affiliate member of the Intermarket Surveillance Group (``ISG'') and is 
party to an affiliate agreement and an agreement to share market 
surveillance and regulatory information with the other ISG members. 
Further, CME is party to a supplemental agreement with the other ISG 
members to address the concerns expressed by the Commission with 
respect to affiliate ISG membership.\25\ Finally, CME Rule 424 permits 
CME to enter into agreements for the exchange of information and other 
forms of mutual assistance with domestic or foreign self-regulatory 
organizations, associations, boards of trade, and their respective 
regulators.
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    \24\ 15 U.S.C. 78f(h)(3)(I).
    \25\ See Securities Exchange Act Release No. 45956 (May 17, 
2002), 67 FR 36740 (May 24, 2002) (joint CFTC and Commission rule 
relating to cash settlement and regulatory halt requirements for 
SFPs).
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    Clause (J) of Section 6(h)(3) of the Act \26\ requires that a 
market on which a SFP is traded have in place audit trails necessary or 
appropriate to facilitate the coordinated surveillance referred to in 
the preceding paragraph. The Exchange states that it relies upon its 
Market Regulation Department and its large, highly trained staff to 
actively monitor market participants and their trading practices and to 
enforce compliance with CME rules. CME Market Regulation Department 
staff is organized into Compliance and Market Surveillance Groups. In 
performing its functions, CME Market Regulation Department routinely 
works closely with CME Audit Department, CME Clearing House, CME Legal 
Department, CME Globex Control Center, and CME Information Technology 
Department.
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    \26\ 15 U.S.C. 78f(h)(3)(J).
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    CME Compliance is responsible for enforcing the trading practice 
rules of the Exchange through detection, investigation, and prosecution 
of those

[[Page 39819]]

who may attempt to violate those CME Rules. Further, CME Compliance is 
responsible for handling customer complaints, ensuring the integrity of 
the Exchange's audit trail, and administering an arbitration program 
for the resolution of disputes. CME Compliance employs investigators, 
attorneys, trading floor investigators, data analysts, and a computer 
programming and regulatory systems design staff.
    CME believes that CME Market Regulation Department has created some 
of the most sophisticated tools in the world to assist with the 
detection of possible rule violations and monitoring of the market. 
Among the systems it uses are the Regulatory Trade Browser (``RTB''), 
the Virtual Detection System (``VDS''), the Reportable Position System 
(``RPS''), and the RegWeb Profile System (``RegWeb''). These systems 
include information on all CME Globex users, all transactions, large 
positions, and statistical information on trading entities.
    CME Market Surveillance is dedicated to the detection and 
prevention of market manipulation and other similar forms of market 
disruption. As part of these responsibilities, CME Market Surveillance 
enforces the Exchange's position limit rules, administers the hedge 
approval process, and maintains the Exchange's RPS system.
    CME believes that the foundation of the CME Market Surveillance 
program is the deep knowledge of its staff about the major users, 
brokers, and clearing firms, along with its relationship with other 
regulators. Day-to-day monitoring of market positions is handled by a 
dedicated group of surveillance analysts assigned to specific 
market(s). Each analyst develops in-depth expertise of the factors that 
influence the market in question. The Exchange estimates that perhaps 
90% of the market users at any single time are known to the Exchange. 
Daily surveillance staff activities include:
     Monitoring positions for size based on percentage of open 
interest and historic user participation in each contract.
     Aggregation of positions across clearing members with the 
use of CME trade reporting systems to account for all positions held by 
any single participant. CME believes that this daily review permits the 
surveillance analyst to promptly identify unusual market activity.
     As a contract approaches maturity, large positions are 
scrutinized to determine whether such activity is consistent with prior 
experience, allowing prompt regulatory intervention if necessary.
     Analysts closely monitor market news through on-line and 
print media.
     Staff conducts on-site visits to large market participants 
periodically.
    CME Market Regulation staff investigates possible misconduct and, 
when appropriate, initiates disciplinary action. CME Rule 430 empowers 
the Exchange's disciplinary committees to discipline, limit, suspend, 
or terminate a member's activities for cause, amongst other sanctions. 
Further, per CME Rule 123, the Exchange requires its members to be 
responsible for ``the filing of reports, maintenance of books and 
records, and permitting inspection and visitation'' in order to 
facilitate such investigations by Exchange staff.
    CME Rule 536 requires that certain information be recorded with 
respect to each order, including: Time entered, terms of the order, 
order type, instrument and contract month, price, quantity, account 
type, account designation, user code, and clearing firm. This 
information may be recorded manually on timestamped order tickets, 
electronically in a clearing firms system, or by entering the orders 
with the required information into CME Globex immediately upon receipt. 
A complete CME Globex electronic audit trail is archived and maintained 
by CME for at least a five year period. Clearing firms must also 
maintain any written or electronic order records for a period of five 
years.
    Clause (K) of Section 6(h)(3) of the Act \27\ requires that a 
market on which a SFP is traded have in place procedures to coordinate 
trading halts between such market and any market on which any security 
underlying the SFP is traded and other markets on which any related 
security is traded. The Exchange filed with the Commission CME Rules 
establishing a generalized framework for the trade of SFPs.\28\ In 
particular, proposed CME Rule 71001.F. provides, in accordance with 
Regulation Sec.  41.25(a)(2) of CEA,\29\ that ``[t]rading of Physically 
Delivered Single Security Futures shall be halted at all times that a 
regulatory halt, as defined per SEC Rule 6h-1(a)(3) and CFTC Regulation 
Sec.  41.1(1), has been instituted for the underlying security.''
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    \27\ 15 U.S.C. 78f(h)(3)(K).
    \28\ See SR-CME-2005-03.
    \29\ 17 CFR 41.25(a)(2).
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    Clause (L) of Section 6(h)(3) of the Act \30\ requires that the 
margin requirements for a SFP comply with the regulations prescribed 
pursuant to Section 7(c)(2)(B) of the Act.\31\ CME has margin rules in 
place.\32\ Thus, CME believes that its customer margin rules are 
consistent with the requirements of the Act.
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    \30\ 15 U.S.C. 78f(h)(3)(L).
    \31\ 15 U.S.C. 78g(c)(2)(B).
    \32\ See Securities Exchange Act Release No. 46637 (October 10, 
2002), 67 FR 64672 (October 21, 2002) (SR-CME-2002-01).
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    For the reasons described above, CME believes that CME Listing 
Standards submitted herewith satisfy the requirements set forth in 
Section 6(h)(3) of the Act.\33\
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    \33\ 15 U.S.C. 78f(h)(3).
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2. Statutory Basis
    The Exchange believes that its proposed rule change is consistent 
with Section 6(b) of the Act,\34\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\35\ in particular, in that it 
is designed to remove impediments to and perfect the mechanism for a 
free and open market and a national market system, and, in general, to 
protect investors and the public interest.
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    \34\ 15 U.S.C. 78f(b).
    \35\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    CME does not believe that the proposed rule change would impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    The Exchange has not solicited, and does not intend to solicit, 
comments on this proposed rule change. The Exchange has not received 
any unsolicited written comments from members or other interested 
parties.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    The foregoing proposed rule change has become effective pursuant to 
Section 19(b)(7) of the Act.\36\ Within 60 days of the date of 
effectiveness of the proposed rule change, the Commission, after 
consultation with the CFTC, may summarily abrogate the proposed rule 
change and require that the proposed rule change be refiled in 
accordance with the provisions of Section 19(b)(1) of the Act.\37\
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    \36\ 15 U.S.C. 78s(b)(7).
    \37\ 15 U.S.C. 78s(b)(1).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and

[[Page 39820]]

arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CME-2005-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, Station Place, 100 F 
Street, NE., Washington, DC 20549-9303.
    All submissions should refer to File Number SR-CME-2005-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, 
all written statements with respect to the proposed rule change that 
are filed with the Commission, and all written communications relating 
to the proposed rule change between the Commission and any person, 
other than those that may be withheld from the public in accordance 
with the provisions of 5 U.S.C. 552, will be available for inspection 
and copying in the Commission's Public Reference Section. Copies of 
such filing also will be available for inspection and copying at the 
principal office of CME. All comments received will be posted without 
change; the Commission does not edit personal identifying information 
from submissions. You should submit only information that you wish to 
make available publicly. All submissions should refer to File Number 
SR-CME-2005-02 and should be submitted on or before August 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\38\
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    \38\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3617 Filed 7-8-05; 8:45 am]
BILLING CODE 8010-01-P