[Federal Register Volume 70, Number 131 (Monday, July 11, 2005)]
[Notices]
[Pages 39820-39826]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3618]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51957; File No. SR-CME-2005-03]


Self-Regulatory Organization; Chicago Mercantile Exchange; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change and 
Amendment No. 1 Thereto Relating to Rules Governing Contract 
Specifications for Physically Delivered Single Security Futures

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. On May 31, 
2005, CME filed Amendment No. 1 to the proposed rule change.\3\ The 
Commission is publishing this notice, as amended, to solicit comments 
on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ See letter from John W. Labuszewski, Managing Director, CME, 
to Florence E. Harmon, Senior Special Counsel, Division of Market 
Regulation (``Division''), Commission, on May 31, 2005. (``Amendment 
No. 1''). In Amendment No. 1, the Exchange proposes to amend the 
size of its iShares Russell 2000 (``IWM'') futures contract to 200 
instead of 100 shares. The Exchange believes that this implies that 
the value of the $0.01 minimum price fluctuation shall be $2.00 
instead of $1.00. Also, the Exchange proposes to amend the launch 
date for IWM futures to June 20, 2005 from June 6, 2005.
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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 Exchange Act (``CEA'') \4\ on May 4, 2005.
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    \4\ 7 U.S.C. 7a-2(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 the trade of physically 
delivered single security futures products (``SFPs''). Further, the 
Exchange hereby certifies the listing of futures on Exchange Traded 
Funds (``ETFs''), specifically, the Nasdaq-100 Tracking Stock 
SM (``QQQQ''), Standard & Poor's Depositary Receipts 
[supreg] (``SPDR''), and IWM.\5\ The Exchange believes that these 
contract specifications are substantially similar to contract 
specifications currently in use with respect to physically delivered 
single security futures traded elsewhere. Proposed new language is 
italicized.
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    \5\ The Exchange proposes to make the proposed rule change 
effective on June 6, 2005 when it intends to list for trading 
futures based on SPDRs and QQQQs. The Exchange proposes to list 
futures based on IWMs on June 20, 2005. See Amendment No. 1, supra 
note 3.
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CHAPTER 710: PHYSICALLY DELIVERED SINGLE SECURITY FUTURES

71000. SCOPE OF CHAPTER

    This chapter is limited in application to contract specifications 
applied to security futures contracts that require the physical 
delivery of a single security (a ``Physically Delivered Single Security 
Futures''). Single securities that are eligible for listing per this 
Chapter 710 include those that meeting the initial listing standards 
per Exchange Rule 70001 and the maintenance listing standards per 
Exchange Rule 70002.

71001. FUTURES CALL

71001.A. Trading Unit

    Physically Delivered Single Security Futures contracts shall 
require the delivery of a particular number of shares, as specified per 
Rule 71004, of common stock; an exchange traded fund (``ETF Share''); a 
trust issued receipt (``TIR''); a registered closed-end management 
investment company (``Closed-End Fund Share''); or, American Depository 
Receipts (``ADR'').

71001.B. Price Increments

    Physically Delivered Single Security Futures contracts shall be 
traded in U.S. Dollars with a minimum price increment as determined by 
the Board of Directors as depicted in Rule 71004.

71001.C. Trading Schedule

    Physically Delivered Single Security Futures contracts may be 
traded during such hours, for delivery in such months as determined by 
the Board of Directors.

71001.D. Termination of Trading

    All trading in a particular Physically Delivered Single Security 
Futures contract shall terminate at the close of business on the third 
Friday of the contract month.

71001.E. Position Limits

    Position limits shall be applied on Physically Delivered Single 
Security Futures contracts such that, during the last five trading days 
of an expiring contract month, a person shall not own or control more 
than a specified number of contracts net long or net short in the 
expiring contract month, as depicted in Exchange Rule 71004. Position 
limits for each Physically Delivered Single Security Futures contract 
shall be

[[Page 39821]]

determined on a case-by-case basis at levels no greater than those 
prescribed by CFTC Regulation Sec.  41.25(a)(3).

71001.F. Price Limits and Trading Halts

    There is no daily price limit for Physically Delivered Single 
Security Futures contracts. Trading 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(l), 
has been instituted for the underlying security.

71002. SETTLEMENT PRICE

71002.A. Daily Settlement Price

    Except for the last day of trading on an expiring contract, daily 
settlement prices shall be determined per Rule 813.

71002.B. Final Settlement Price

    On the last day of trading for an expiring contract, the Final 
Settlement Price is determined in accordance with Rule 71002.A. unless 
the Final Settlement Price is fixed in accordance with Rule 70120.

71003. DELIVERY

    Three (3) business days after the last trading day for an expiring 
contract, the National Securities Clearing Corporation and Depository 
Trust Corporation will facilitate delivery of, and payment for, the 
underlying common stock, American Depository Receipts, shares of 
exchange-traded funds, shares of closed-end management investment 
companies, or trust issued receipts whereby: a seller (i.e., the holder 
of a net short position) delivers the securities underlying the 
contract to a respective buyer (i.e., the holder of a net long 
position); and, in exchange, that buyer pays his respective seller the 
aggregate dollar amount of the Expiration Day Settlement Price 
multiplied by the quantity of the underlying securities delivered.\6\
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    \6\ The Exchange has clarified that Depository Trust Corporation 
will facilitate delivery of, and payment for, the underlying common 
stock, American Depository Receipts, shares of exchange-traded 
funds, shares of closed-end management investment companies, or 
trust issued receipts via a participant of DTC with whom CME has a 
dedicated account. Telephone conversation between John Labuszewski, 
Managing Director, CME, and Florence E. Harmon, Senior Special 
Counsel, Division, Commission, on June 9, 2005.
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71004. APPROVED SECURITIES

    The following securities have been approved by the Board of 
Directors as the subject of Physically Delivered Single Security 
Futures Contracts:

----------------------------------------------------------------------------------------------------------------
                                                                                              Position limit in
                                                                                              expiring contract
          Approved security               Unit of trading           Minimum fluctuation       in last 5 trading
                                                                                                     days
----------------------------------------------------------------------------------------------------------------
Nasdaq-100 Tracking Stock\SM\         200 shares.............  $0.01 or $2.00 per contract.               11,250
 (``QQQQ'').
Standard & Poor's Depositary          100 shares.............  $0.01 or $1.00 per contract.               22,500
 Receipts [supreg] (``SPDR'').
iShares Russell 2000 ( ``IWM'').....  200 shares.............  $0.01 or $2.00 per contract.          \7\ 11,250
----------------------------------------------------------------------------------------------------------------
\7\ Trading in physically settled futures on IWMs did not qualify for the 22,500 position limit pursuant to CFTC
  Regulation Sec.   41.25(a)(3)(i)(A) prior to the 2-for-1 split with an ex-date of June 9, 2005. However, after
  the split, futures based on IWMs do qualify for a net position limit no greater than 22,500 (100 share
  contract) pursuant to this CFTC Regulation. To the extent that CME amended the IWM contract size from the
  originally proposed 100 share contract to 200 share contract as a result of the split, the applicable position
  limit for futures on IWM contracts pursuant to CFTC Regulation Sec.   41.25 would be 11,250. Telephone
  conversation between John Labuszewski, Managing Director, CME, and Florence E. Harmon, Senior Special Counsel,
  Division, Commission, on June 28, 2005.

71005. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT

    If delivery or acceptance or any precondition or requirement of 
either is prevented by a strike, fire, accident, action of government 
or act of God, the seller or buyer shall immediately notify the 
Exchange President. If the President determines that emergency action 
may be necessary, he shall call a special meeting of the Board of 
Directors and arrange for the presentation of evidence respecting the 
emergency condition. If the Board determines that an emergency 
condition exists, it shall take such action as it deems necessary under 
the circumstances and its decision shall be binding upon all parties to 
the contract.

INTERPRETATIONS & SPECIAL NOTICES RELATING TO CHAPTER 710

    Standard & Poor's, a division of The McGraw-Hill Companies, Inc. 
(``S&P''), does not guarantee the accuracy and/or completeness of the 
S&P Stock Indices or any data included therein. S&P makes no warranty, 
express or implied, as to the results to be obtained by any person or 
any entity from the use of the S&P Index ETFs or any data included 
therein in connection with the trading of futures contracts, options on 
futures contracts or any other use. S&P makes no express or implied 
warranties, and expressly disclaims all warranties of merchantability 
or fitness for a particular purpose or use with respect to the S&P 
Index ETFs or any data included therein. Without limiting any of the 
foregoing, in no event shall S&P have any liability for any special, 
punitive, indirect, or consequential damages (including lost profits), 
even if notified of the possibility of such damages.
    NEITHER FRANK RUSSELL COMPANY'S PUBLICATION OF THE RUSSELL INDEXES 
NOR ITS LICENSING OF ITS TRADEMARKS FOR USE IN CONNECTION WITH 
SECURITIES OR OTHER FINANCIAL PRODUCTS DERIVED FROM A RUSSELL INDEX IN 
ANY WAY SUGGESTS OR IMPLIES A REPRESENTATION OR OPINION BY FRANK 
RUSSELL COMPANY AS TO THE ATTRACTIVENESS OF INVESTMENT IN ANY 
SECURITIES OR OTHER FINANCIAL PRODUCTS BASED UPON OR DERIVED FROM ANY 
RUSSELL INDEX. FRANK RUSSELL COMPANY IS NOT THE ISSUER OF ANY SUCH 
SECURITIES OR OTHER FINANCIAL PRODUCTS AND MAKES NO EXPRESS OR IMPLIED 
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE 
WITH RESPECT TO ANY RUSSELL INDEX OR ANY DATA INCLUDED OR REFLECTED 
THEREIN, NOR AS TO RESULTS TO BE OBTAINED BY ANY PERSON OR ANY ENTITY 
FROM THE USE OF THE RUSSELL INDEX OR ANY DATA INCLUDED OR REFLECTED 
THEREIN.

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, as 
amended. The text of these statements may be examined at the places 
specified in Item IV below. The Exchange has prepared

[[Page 39822]]

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 proposes to adopt contract specifications governing 
physically delivered single security futures. Further, the Exchange 
proposes to list for trading, per such rules, futures on ETFs, 
specifically, QQQQ, SPDR, and IWM. The Exchange intends to offer 
physically delivered single security futures exclusively on CME's 
GLOBEX[supreg] electronic trading platform as opposed to trading on the 
floor of the Exchange.
    Contract Size--CME Rule 71001.A., Trading Unit, specifies that 
``Physically Delivered Single Security Futures contracts shall require 
the delivery of a particular number of shares, as specified per CME 
Rule 71004, of common stock; an exchange traded fund (`ETF Share'); a 
trust issued receipt (`TIR'); a registered closed-end management 
investment company (`Closed-End Fund Share'); or, American Depository 
Receipts (`ADR').'' CME Rule 71004, Approved Securities, provides that 
futures based on SPDRs shall be traded in units of 100 shares. SPDRs 
closed at $117.96 on March 31, 2005. The Exchange believes that this 
implies a contract valuation of $11,796. However, the Exchange proposes 
to trade QQQQs and IWMs based upon a 200-share unit. The Nasdaq-100 
Tracking Stock closed at $36.57 on March 31, 2005, which equates to a 
contract value of $7,314. IWMs closed at $124.24 on March 31, 2005 but 
are scheduled to be split on a 2-for-1 basis on June 9, 2005 which, the 
Exchange believes, implies a post-split share value of $62.12 or a 
contract value of $12,424 based upon a 200-share contract.
    The Exchange believes that these values are generally somewhat 
smaller than the size of the E-mini S&P 500, E-mini Russell 2000, and 
E-mini Nasdaq-100. The Exchange further believes that they are 
generally, with the exception of QQQQs and IWMs, consistent with 
practices in the context of other SFPs and with ETF-based options 
traded on stock option exchanges, which are generally based upon a 100-
share trading unit.
    Quotation Specification--CME Rule 71002.B., Price Increments, 
provides that ``Physically Delivered Single Security Futures contracts 
shall be traded in U.S. Dollars with a minimum price increment as 
determined by the Board of Directors as depicted in Rule 71004.'' CME 
Rule 71004, Approved Securities, provides that ETF futures would be 
quoted in minimum increments of $0.01 per share. The Exchange believes 
that this equates to a $1.00 tick in the context of SPDRs and a $2.00 
tick in QQQQs and IWMs. The Exchange further believes that this 
provision is not inconsistent with provisions associated with other 
extant SFPs or stock options based on ETFs. Moreover, the Exchange 
believes that a penny tick matches practices in the underlying ETF 
markets.
    Position Limits--CME Rule 71001.E., Position Limits, provides that 
``[p]osition limits shall be applied on Physically Delivered Single 
Security Futures contracts such that, during the last five trading days 
of an expiring contract month, a person shall not own or control more 
than a specified number of contracts net long or net short in the 
expiring contract month, as depicted in CME Rule 71004. Position limits 
for each Physically Delivered Single Security Futures contract shall be 
determined on a case-by-case basis in accordance with CFTC Regulation 
Sec.  41.25(a)(3).'' CME Rule 71004, Approved Securities, provides that 
the position limit applied to futures based on QQQQs and IWMs during 
the last five trading days of an expiring contract month shall be 
11,250 contracts and 22,500 contracts for SPDRs. The Exchange 
represents that these figures were determined by reference to CFTC 
Regulation Sec.  41.25(a)(3),\8\ which prescribes appropriate position 
limits by reference to the average daily volume (ADV) in the security 
over the prior six (6) months and the shares outstanding.
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    \8\ 17 CFR 41.25(a)(3). IWMs qualify for the 22,500 position 
limit on a post-split basis because the trading volume and shares 
outstanding doubled due to the 2-for-1 split on June 9, 2005. 
Because of the split, the average daily trading volume is considered 
doubled for the most recent six-month period in compliance with CFTC 
Regulation Sec.  41.25. Telephone conservation between John 
Labuszewski, Managing Director, CME, and Florence E. Harmon, Senior 
Special Counsel, Division, Commission, on June 28, 2005.

----------------------------------------------------------------------------------------------------------------
                                                                                            Shares outstanding
                                                                   ADV  (10/04-3/05)              (000)
----------------------------------------------------------------------------------------------------------------
SPDRs.........................................................               51,890,256        425,860 (4/22/05)
IWMs (pre-split)..............................................                8,022,330         40,950 (4/22/05)
IWMs (post-split).............................................               16,044,660         81,900 (4/22/05)
QQQQs.........................................................               98,137,035        520,900 (4/21/05)
----------------------------------------------------------------------------------------------------------------

    The Exchange believes that the 11,250 contract limit adopted in the 
context of IWMs and QQQQs is in conformance with CFTC Regulation Sec.  
41.25(a)(3)(i)(A) \9\ which specifies that ``where the average daily 
trading volume in the underlying security exceeds 20 million shares, or 
exceeds 15 million shares and there are more than 40 million shares of 
the underlying shares of the underlying security outstanding, the 
designated contract market * * * may adopt a net position limit no 
greater than 22,500 (100-share) contracts.'' However, to the extent 
that the Exchange proposes to adopt a 200-share contract with respect 
to IWMs and QQQQs, the 22,500 limit need be halved to 11,250 contracts. 
Finally, the Exchange believes that SPDRs likewise exceed the 
parameters specified per CFTC Regulation Sec.  41.25(a)(3)(i)(A).\10\ 
Thus, the Exchange proposes to adopt a 22,500 limit, noting the 
proposed 100-share contract size.
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    \9\ 17 CFR 41.25(a)(3)(i)(A).
    \10\ 17 CFR 41.25(a)(3)(i)(A).
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    Trading Schedule--The CME Board has determined that trading in 
futures on the three ETFs mentioned above shall be conducted from 8:30 
a.m. to 3:15 p.m., Mondays through Fridays (Chicago time), when the 
underlying markets for the ETFs are open.\11\ The CME Board has further 
determined initially to list futures for delivery in the first two 
quarterly delivery months in the March, June, September, and December 
cycle plus the first two non-quarterly or ``serial'' months (January, 
February, April, May, July, August, October, November) per CME Rule 
71001.C., Trading Schedule.
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    \11\ CME confirmed that futures on the three ETFs would not be 
traded during holidays and other periods when the underlying markets 
for the ETFs are not open. Telephone conversation between Richard 
Co, Director of Financial Research, CME, and Florence E. Harmon, 
Senior Special Counsel, Division, Commission, on June 24, 2005.

[[Page 39823]]



                      Summary Terms and Conditions
------------------------------------------------------------------------
 
------------------------------------------------------------------------
Contract Size................  One-hundred (100) ETF shares of S&P 500
                                (SPDR); or two-hundred (200) shares of
                                Nasdaq-100 Tracking Stock\SM\ (QQQQ) or
                                iShares Russell 2000 (IWM).
Contract Months..............  March Quarterly Cycle plus first two
                                serial months.
Trading Hours................  Traded on the GLOBEX[supreg] electronic
                                trading platform from 8:30 am to 3:15 pm
                                Mondays through Fridays (Chicago times).
Minimum Price Fluctuation....  $0.01 or $1.00 per contract in context of
                                SPDRs; $2.00 per contract in context of
                                QQQQs and IWMs.
Trading Halts................  Trading halts are coordinated with halts
                                in the underlying ETFs.
Position Limits..............  11,250 contracts for QQQQs and IWMs and
                                22,500 contracts for SPDRs net long or
                                short during the last five (5) trading
                                days of an expiring contract.
Final Settlement Date........  Third Friday of the Contract Month.
Last Trading Day.............  Trades until the normal close of trading
                                on the Final Settlement Date.
Final Settlement.............  Final settlement is accomplished through
                                delivery of the requisite number of ETF
                                shares.
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    Trading Halts--CME Rule 71001.F., Price Limits and Trading Halts, 
provides that there would be no daily price limit for Physically 
Delivered Single Security Futures contracts. However, trading of 
Physically Delivered Single Security Futures shall be halted at all 
times that a regulatory halt, as defined in CFTC Regulation 
41.1(1),\12\ has been instituted for the underlying security. The 
Exchange believes that this provision is consistent with the 
prescriptions of CFTC Regulation Sec.  41.25(a)(2)(i) \13\ and Rule 6h-
1(a)(3) of the Act.\14\
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    \12\ 17 CFR 41.1(1).
    \13\ 17 CFR 41.25(a)(2)(i).
    \14\ 17 CFR 240.6h-1(a)(3).
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    Daily Settlement--Settlement prices on a daily basis shall be 
established per current Exchange practices as defined in CME Rule 813, 
Settlement Price.
    Final Settlement--Final settlement would be accomplished through 
the delivery of the underlying securities against the expiring contract 
per the provisions of CME Rule 71003, Delivery. Specifically, CME Rule 
71003 provides that ``[t]hree (3) business days after the last trading 
day for an expiring contract, the National Securities Clearing 
Corporation (``NSCC'') and Depository Trust Corporation (``DTC'') will 
facilitate delivery of, and payment for, the underlying * * * 
[security] * * * whereby: A seller * * * delivers the securities * * * 
and, in exchange, that buyer pays his respective seller the aggregate 
dollar amount of the Expiration Day Settlement Price multiplied by the 
quantity of the underlying securities delivered.'' \15\ The invoice 
amount would be established per CME Rule 71002.B., Final Settlement 
Price, as the closing price of the futures contract established per 
normal settlement procedures.\16\ Deliveries shall be facilitated 
through the CME Clearing House and its designated facilitating agents.
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    \15\ As described below, CME has reached an agreement with a 
participant of DTC, a registered clearing agency, to facilitate the 
delivery-versus-payment transactions that result from an agreement 
to make or take delivery of the ETFs.
    \16\ See Amendment No. 1, supra note 3.
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    Compliance With Listing Standards--Single securities eligible for 
listing per these proposed rules would be governed by Chapter 700 of 
the Exchange's Rulebook (``Rulebook''), which specifies initial and 
maintenance listing standards for physically delivered single security 
futures and for security futures based on an Index of two or more 
securities.\17\ The Exchange believes that Chapter 710 of the Rulebook 
governing physically delivered single security futures is based closely 
upon the specifications under which single security futures are traded 
elsewhere.
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    \17\ Chapter 700 of the CME Rulebook has been developed for 
purposes of compliance with Section 6(h) of the Act. CME believes 
that CME Listing Standards are generally identical to the sample 
listing standards published in the Commission's, Division of Market 
Regulation Staff Legal Bulletin No. 15, as supplemented by the Joint 
Order of the Commission and CFTC identifying listing standards for 
shares of ETFs, TIRs, and Closed-End Fund. See Commission, Division: 
Staff Legal Bulletin No. 15: Listing Standards for Trading Security 
Futures Products (September 5, 2001). See also Securities Exchange 
Act Release No. 46090 (June 19, 2002), 67 FR 42760 (June 25, 2002).
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    In order to attain initial eligibility for listing, a security must 
comply with certain requirements with respect to activity and issue 
size as discussed below. As illustrated in the accompanying table, all 
three of the subject securities meet the qualifications for initial 
listing as specified above.
     Per CME Rule 70001.1., ``[t]here must be at least seven 
million shares or receipts evidencing the underlying security 
outstanding.''
     Per CME Rule 70001.7, ``it must have had a total trading 
volume * * * of at least 2,400,000 shares or receipts evidencing the 
underlying security in the preceding 12 months.''
     Per CME Rule 70001.8, ``the market price per share of the 
underlying security has been at least $3.00 for the previous five 
consecutive business days preceding the date on which the Exchange 
commences to list and trade the Security Futures Product on said 
underlying security.'' \18\
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    \18\ The joint order by the CFTC and the Commission modifying 
the requirement specified in Section 6(h)(3)(D) of the Act and the 
criterion specified in Section 2(a)(1)(D)(i)(III) of the CEA to 
permit an ETF share, TIR or Closed-End Fund share to underlie a 
security future also provides that the market price of the 
underlying share be $7.50 for the majority of business days during 
the three calendar months preceding listing of the SFP and that the 
issuer of the ETF, TIR, or Closed-End Fund be in compliance with all 
of the applicable requirements of the Act. See Securities Exchange 
Act Release No. 46090 (June 19, 2002), 67 FR 42760 (June 25, 2002). 
CME intends to comply with this joint order. Telephone conversation 
between John Labuszewski, Managing Director, CME, and Florence E. 
Harmon, Senior Special Counsel, Division of Market Regulation 
(``Division''), Commission, on June 28, 2005.

----------------------------------------------------------------------------------------------------------------
                                                          Shares outstanding   Total volume  (4/   Price  (3/31/
                                                                 (000)             04-3/05)             05)
----------------------------------------------------------------------------------------------------------------
SPDRs...................................................   425,860 (4/22/05)      11,841,058,200         $117.96
IWMs....................................................    40,950 (4/22/05)       1,849,663,900          112.15
QQQQs...................................................   520,900 (4/21/05)      24,973,601,523           36.57
----------------------------------------------------------------------------------------------------------------

Section 6(h)(3) of the Act Requirements


[[Page 39824]]


    Section 6(h)(3) of the Act \19\ 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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    \19\ 15 U.S.C. 78f(h)(3).
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    Clause (A) of Section 6(h)(3) of the Act \20\ requires that any 
security underlying a SFP be registered pursuant to Section 12 of the 
Act.\21\ 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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    \20\ 15 U.S.C. 78f(h)(3)(A).
    \21\ 15 U.S.C. 78l.
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    Clause (B) of Section 6(h)(3) of the Act \22\ 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.\23\ 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 
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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    \22\ 15 U.S.C. 78f(h)(3)(B).
    \23\ 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, Commission, on June 9, 
2005.
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    Clause (C) of Section 6(h)(3) of the Act \24\ 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.\25\ 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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    \24\ 15 U.S.C. 78f(h)(3)(C).
    \25\ 15 U.S.C. 78o-3(a).
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    Clause (D) of Section 6(h)(3) of the Act \26\ 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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    \26\ 15 U.S.C. 78f(h)(3)(D).
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    Clause (E) of Section 6(h)(3) of the Act \27\ 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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    \27\ 15 U.S.C. 78f(h)(3)(E).
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    Clause (F) of Section 6(h)(3) of the Act \28\ 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 \29\ 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.\30\ 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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    \28\ 15 U.S.C. 78f(h)(3)(F).
    \29\ 15 U.S.C. 78o-3(a).
    \30\ 15 U.S.C. 78o-3(a).
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    Clause (G) of Section 6(h)(3) of the Act \31\ requires that each 
SFP be subject to the prohibition against dual trading in Section 4j of 
CEA \32\ and the rules and regulations thereunder or the provisions of 
Section 11(a) of the Act \33\ 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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    \31\ 15 U.S.C. 78f(h)(3)(G).
    \32\ 15 U.S.C. 4j.
    \33\ 15 U.S.C. 78k(a).
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    Further, the prohibition of dual trading in SFPs per Regulation 
Sec.  41.27 \34\ adopted pursuant to Section 4j(a) of CEA \35\ 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.
    Clause (H) of Section 6(h)(3) of the Act \36\ 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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    \34\ 17 CFR 41.27.
    \35\ 7 U.S.C. 6j(a).
    \36\ 15 U.S.C. 78f(h)(3)(H).
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    Clause (I) of Section 6(h)(3) of the Act \37\ 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

[[Page 39825]]

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.\38\ 
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.
    Clause (J) of Section 6(h)(3) of the Act \39\ 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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    \37\ 15 U.S.C. 78f(h)(3)(I).
    \38\ 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).
    \39\ 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 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 \40\ 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.\41\ In 
particular, proposed CME Rule 71001.F. provides, in accordance with 
Regulation Sec.  41.25(a)(2) of CEA,\42\ 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(l), has been instituted for the underlying security.''
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    \40\ U.S.C. 78f(h)(3)(K).
    \41\ See SR-CME-2005-03.
    \42\ 17 CFR 41.25(a)(2).
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    Clause (L) of Section 6(h)(3) of the Act \43\ requires that the 
margin requirements for a SFP comply with the regulations prescribed 
pursuant to Section 7(c)(2)(B) of the Act.\44\ CME has margin rules in 
place.\45\ Thus, CME believes that its customer margin rules are 
consistent with the requirements of the Act.
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    \43\ 15 U.S.C. 78f(h)(3)(L).
    \44\ 15 U.S.C. 78g(c)(2)(B).
    \45\ 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.\46\
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    \46\ 15 U.S.C. 78f(h)(3).
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2. Statutory Basis
    The Exchange believes that its proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\47\ in general, and furthers 
the objectives of Section 6(b)(5) of the Act,\48\ 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

[[Page 39826]]

general, to protect investors and the public interest.
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    \47\ 15 U.S.C. 78f(b).
    \48\ 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, as amended, 
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, as amended, has become 
effective pursuant to Section 19(b)(7) of the Act.\49\ Within 60 days 
of the date of effectiveness of the proposed rule change, as amended, 
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.\50\
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    \49\ 15 U.S.C. 78s(b)(7).
    \50\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
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-2005-03 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-2005-03. 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-2005-03 and should be submitted on or before August 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\51\
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    \51\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3618 Filed 7-8-05; 8:45 am]
BILLING CODE 8010-01-P