[Federal Register Volume 70, Number 131 (Monday, July 11, 2005)]
[Notices]
[Pages 39826-39832]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3620]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-51959; File No. SR-CME-2005-01]


Self-Regulatory Organization; Chicago Mercantile Exchange; Notice 
of Filing and Immediate Effectiveness of a Proposed Rule Change 
Relating to Listing Standards for Security Futures Products

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 CME.
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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 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-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 amend its Security Futures Product Listing 
Standards (``Listing Standards'') for purposes of Section 6(h) of the 
Act.\4\ These amendments are intended to conform CME Listing Standards 
for physically settled security futures products, including exchange 
traded funds (``ETFs''), trust issued receipts (``TIRs''), closed-end 
funds and narrow-based indices (``NRIs''), to current industry 
practices. The text of the proposed rule change is below. Proposed new 
language is italicized; and proposed deletions are in [brackets].
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    \4\ 15 U.S.C. 78f(h).
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CHAPTER 700: SECURITY FUTURES PRODUCT LISTING STANDARDS

70000. SCOPE OF CHAPTER
    No change.
70001. SINGLE SECURITY FUTURES--INITIAL LISTING STANDARDS
    For a Security Futures Product, that is physically settled, to be 
eligible for initial listing, the security underlying the futures 
contract must meet each of the following requirements:
    1.-5. No change.
    6. In the case of an underlying security other than an ETF Share, 
TIR or Closed-End Fund Share, it must have had [an average daily 
trading volume (in all markets in which the underlying security has 
traded) of at least 109,000 shares or receipts evidencing the 
underlying security in each of the preceding 12 months.] total trading 
volume (in all markets in which the underlying security is traded) of 
at least 2,400,000 shares or receipts evidencing the underlying 
security in the preceding 12 months.
Interpretation of Requirement 6 as Applied to Restructure Securities
    No change.
    7. No change.
    8. [It must have had a market price per security of at least $7.50, 
as measured by the lowest closing price

[[Page 39827]]

reported in any market in which it has traded, for the majority of 
business days during the three calendar months preceding the date of 
selection.] If the underlying security is a ``covered security as 
defined under Section 18(b)(1)(A) of the Securities Act of 1933, 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. For purposes of this 
provision, the market price of such underlying security is measured by 
the closing price reported in the primary market in which the 
underlying security is traded.
Interpretation of Requirement 8 as Applied to Restructure Securities
    Look-Back Test: In determining whether a Restructure Security that 
is issued or distributed to the shareholders of an Original Equity 
Security (but not a Restructure Security that is issued pursuant to a 
public offering or rights distribution) satisfies this requirement, the 
Exchange may ``look back'' to the market price history of the Original 
Equity Security prior to the ex-date of the Restructuring Transaction 
if the following Look-Back Test is satisfied:
    a. The Restructure Security has an aggregate market value of at 
least $500 million;
    b. The aggregate market value of the Restructure Security equals or 
exceeds the Relevant Percentage (defined below) of the aggregate market 
value of the Original Equity Security;
    c. The aggregate book value of the assets attributed to the 
business represented by the Restructure Security equals or exceeds both 
$50 million and the Relevant Percentage of the aggregate book value of 
the assets attributed to the business represented by the Original 
Equity Security; or
    d. The revenues attributed to the business represented by the 
Restructure Security equals or exceeds both $50 million and the 
Relevant Percentage of the revenues attributed to the business 
represented by the Original Equity Security.
    For purposes of determining whether the Look-Back Test is 
satisfied, the term ``Relevant Percentage'' means: (i) 25%, when the 
applicable measure determined with respect to the Original Equity 
Security or the business it represents includes the business 
represented by the Restructure Security; and (ii) 33\1/3\%, when the 
applicable measure determined with respect to the Original Equity 
Security or the business it represents excludes the business 
represented by the Restructure Security.
    In calculating comparative aggregate market values, the Exchange 
will use the Restructure Security's closing price on its primary market 
on the last business day prior to the Selection Date, or the 
Restructure Security's opening price on its primary market on the 
Selection Date, and will use the corresponding closing or opening price 
of the related Original Equity Security.
    Furthermore, in calculating comparative asset values and revenues, 
the Exchange will use the issuer's (i) latest annual financial 
statements or (ii) most recently available interim financial statements 
(so long as such interim financial statements cover a period of not 
less than three months), whichever are more recent. Those financial 
statements may be audited or unaudited and may be pro forma.
    Restructure Securities Issued in Public Offering or Rights 
Distribution: In determining whether a Restructure Security that is 
distributed pursuant to a public offering or a rights distribution 
satisfies requirement [(viii)] 8, the Exchange may look back to the 
market price history of the Original Equity Security if: (i) The 
foregoing Look-Back Test is satisfied; (ii) the Restructure Security 
trades ``regular way'' on an exchange or automatic quotation system for 
at least five trading days immediately preceding the Selection Date; 
and (iii) at the close of trading on each trading day on which the 
Restructure Security trades ``regular way'' prior to the Selection 
Date, as well as at the opening of trading on Selection Date, the 
market price of the Restructure Security was at least [$7.50]; $3.00.
    Limitation on Use of Look-Back Test: Except in the case of a 
Restructure Security that is distributed pursuant to a public offering 
or rights distribution, the Exchange will not rely upon the market 
price history of an Original Equity Security for any trading day unless 
it also relies upon the trading volume history for that trading day. In 
addition, once the Exchange commences to rely upon a Restructure 
Security's trading volume and market price history for any trading day, 
the Exchange will not rely upon the trading volume and market price 
history of the related Original Equity Security for any trading day 
thereafter.
    9. If the underlying security is not a ``covered security as 
defined under Section 18(b)(1)(A) of the Securities Act of 1933, the 
market price per share of the underlying security has been at least 
$7.50 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. For purposes of this 
provision, the market price of such underlying security is measured by 
the closing price reported in the primary market in which the 
underlying security is traded.

Interpretation of Requirement 9 as Applied to Restructure Securities

    Look-Back Test: In determining whether a Restructure Security that 
is issued or distributed to the shareholders of an Original Equity 
Security (but not a Restructure Security that is issued pursuant to a 
public offering or rights distribution) satisfies this requirement, the 
Exchange may ``look back'' to the market price history of the Original 
Equity Security prior to the ex-date of the Restructuring Transaction 
if the following Look-Back Test is satisfied:
    a. The Restructure Security has an aggregate market value of at 
least $500 million;
    b. The aggregate market value of the Restructure Security equals or 
exceeds the Relevant Percentage (defined below) of the aggregate market 
value of the Original Equity Security;
    c. The aggregate book value of the assets attributed to the 
business represented by the Restructure Security equals or exceeds both 
$50 million and the Relevant Percentage of the aggregate book value of 
the assets attributed to the business represented by the Original 
Equity Security; or
    d. The revenues attributed to the business represented by the 
Restructure Security equals or exceeds both $50 million and the 
Relevant Percentage of the revenues attributed to the business 
represented by the Original Equity Security.
    For purposes of determining whether the Look-Back Test is 
satisfied, the term ``Relevant Percentage'' means: (i) 25%, when the 
applicable measure determined with respect to the Original Equity 
Security or the business it represents includes the business 
represented by the Restructure Security; and (ii) 33\1/3\%, when the 
applicable measure determined with respect to the Original Equity 
Security or the business it represents excludes the business 
represented by the Restructure Security.
    In calculating comparative aggregate market values, the Exchange 
will use the Restructure Security's closing price on its primary market 
on the last business day prior to the Selection Date, or the 
Restructure Security's opening price on its primary market on the 
Selection Date, and will use the corresponding closing or opening price 
of the related Original Equity Security.

[[Page 39828]]

    Furthermore, in calculating comparative asset values and revenues, 
the Exchange will use the issuer's (i) latest annual financial 
statements or (ii) most recently available interim financial statements 
(so long as such interim financial statements cover a period of not 
less than three months), whichever are more recent. Those financial 
statements may be audited or unaudited and may be pro forma.
    Restructure Securities Issued in Public Offering or Rights 
Distribution: In determining whether a Restructure Security that is 
distributed pursuant to a public offering or a rights distribution 
satisfies requirement [(viii)] 8, the Exchange may look back to the 
market price history of the Original Equity Security if: (i) The 
foregoing Look-Back Test is satisfied; (ii) the Restructure Security 
trades ``regular way'' on an exchange or automatic quotation system for 
at least five trading days immediately preceding the Selection Date; 
and (iii) at the close of trading on each trading day on which the 
Restructure Security trades ``regular way'' prior to the Selection 
Date, as well as at the opening of trading on Selection Date, the 
market price of the Restructure Security was at least $7.50.
    Limitation on Use of Look-Back Test: Except in the case of a 
Restructure Security that is distributed pursuant to a public offering 
or rights distribution, the Exchange will not rely upon the market 
price history of an Original Equity Security for any trading day unless 
it also relies upon the trading volume history for that trading day. In 
addition, once the Exchange commences to rely upon a Restructure 
Security's trading volume and market price history for any trading day, 
the Exchange will not rely upon the trading volume and market price 
history of the related Original Equity Security for any trading day 
thereafter.
    [9.] 10. If the underlying security is an ADR:
    a. The Exchange must have an effective surveillance sharing 
agreement with the primary exchange in the home country where the stock 
underlying the ADR is traded;
    b. The combined trading volume of the ADR and other related ADRs 
and securities in the U.S. ADR market, or in markets with which the 
Exchange has in place an effective surveillance sharing agreement, 
represents (on a share equivalent basis) at least 50% of the combined 
worldwide trading volume in the ADR, the security underlying the ADR, 
other classes of common stock related to the underlying security, and 
ADRs overlying such other stock over the three-month period preceding 
the dates of selection of the ADR for futures trading (``Selection 
Date'');
    c.
    (1) The combined trading volume of the ADR and other related ADRs 
and securities in the U.S. ADR market, and in markets where the 
Exchange has in place an effective surveillance sharing agreement, 
represents (on a share equivalent basis) at least 20% of the combined 
worldwide trading volume in the ADR and in other related ADRs and 
securities over the three-month period preceding the Selection Date;
    (2) The average daily trading volume for the ADR in the U.S. 
markets over the three-month period preceding the Selection Date is at 
least 100,000 receipts; and
    (3) The daily trading volume for the ADR is at least 60,000 
receipts in the U.S. markets on a majority of the trading days for the 
three-month period preceding the Selection Date.
     Or
    d. The Securities and Exchange Commission and Commodity Futures 
Trading Commission have otherwise authorized the listing.
    [10.] 11. The Exchange will not list for trading any SFP where the 
underlying security is a Restructure Security that is not yet issued 
and outstanding, regardless of whether the Restructure Security is 
trading on a ``when issued'' basis or on another basis that is 
contingent upon the issuance or distribution of securities.
70002. SINGLE SECURITY FUTURES--MAINTENANCE LISTING STANDARDS
    1. [Absent exceptional circumstances, the] The Exchange will not 
open for trading any SFP, that is physically settled, with a new 
delivery month, and may prohibit any opening purchase transactions in 
the SFP already trading, to the extent it deems such action necessary 
or appropriate, unless the underlying security meets each of the 
following maintenance requirements; provided that, if the underlying 
security is an ETF Share, TIR or Closed-End Fund Share, the applicable 
requirements for initial listing of the related SFP (as described in 
Rule 70001 above) shall apply in lieu of the following maintenance 
requirements:
    a. It must be registered under Section 12 of the Exchange Act.
    [a.] b. There must be at least 6,300,000 shares or receipts 
evidencing the underlying security outstanding that are owned by 
persons other than those who are required to report their security 
holdings pursuant to Section 16(a) of the Exchange Act.
    [b.] c. There must be at least 1,600 securityholders.
    [c.] d. It must have had an average daily trading volume (across 
all markets in which the underlying security is traded) of least 82,000 
shares or receipts evidencing the underlying security in each of the 
preceding 12 months.
Interpretation of Requirement [1.c.] 1.d. as Applied to Restructure 
Securities
    If a Restructure Security is approved for a SFP trading under the 
initial listing standards in [Section I] Rule 70001, the average daily 
trading volume history of the Original Equity Security (as defined in 
[Section I] Rule 70001) prior to the commencement of trading in the 
Restructure Security (as defined in [Section I] Rule 70001), including 
``when-issued'' trading, may be taken into account in determining 
whether this requirement is satisfied.
    [d.] The security underlying the Security Futures Product must have 
had a market price of at least $5.00, as measured by the highest 
closing price reported in any market in which it has traded, for a 
majority of business days during the preceding six calendar months; 
provided, however, that the Exchange may waive this requirement and 
open for trading a SFP with a new delivery month, if:
    (1) The aggregate market value of the underlying security equals or 
exceeds $50 million;
    (2) Customer open interest (reflected on a two-sided basis) equals 
or exceeds 4,000 contracts for all delivery months;
    (3) Its average daily trading volume (in all markets in which the 
underlying security is traded) has been at least 109,000 shares or 
receipts evidencing the underlying security in each of the preceding 12 
months; and
    (4) The market price per share or receipt of the underlying 
security closed at $3.00 or above on a majority of the business days 
during the preceding six calendar months, as measured by the highest 
closing price for the underlying security reported in any market in 
which the underlying security traded, and the market price per share or 
receipt of the underlying security is at least $3.00 at the time such 
additional series are authorized for trading. During the next 
consecutive six calendar month period, to satisfy this paragraph, the 
market price per share or receipt of the underlying security must be at 
least $4.00.]
    e. The market price per share or receipt of the underlying security 
has not closed below $3.00 on the previous trading day to the 
Expiration Day of the nearest expiring Contract on the underlying 
security. The market price per share of the underlying security will be 
measured by the closing price

[[Page 39829]]

reported in the primary market in which the underlying security traded.
Interpretation of Requirement [d] 1.e. as Applied to Restructure 
Securities
    If a Restructure Security is approved for SFP trading under the 
initial listing standards per Rule 70001[.8], the market price history 
of the Original Equity Security prior to the commencement of trading in 
the Restructure Security, including ``when-issued'' trading, may be 
taken into account in determining whether this requirement is 
satisfied.
    [e.] f. If the underlying security is an ADR and was initially 
deemed appropriate for SFP trading per Rule 70001.10.b or Rule 
70001.10.c.[.8.b. or 70001.8.c.], the Exchange will not open for 
trading SFPs having additional delivery months on the ADR unless:
    (1) The percentage of worldwide trading volume in the ADR and other 
related securities that takes place in the U.S. and in markets with 
which the Exchange has in place effective surveillance sharing 
agreements for any consecutive three-month period is: (1) At least 30%, 
without regard to the average daily trading volume in the ADR; or (2) 
at least 15% when the average U.S. daily trading volume in the ADR for 
the previous three months is at least 70,000 receipts;
    (2) The Exchange has in place an effective surveillance sharing 
agreement with the primary exchange in the home country where the 
security underlying the ADR is traded; or
    (3) The Securities and Exchange Commission and Commodity Futures 
Trading Commission have otherwise authorized the listing.
    2.-4. No change.
70003. SFPs BASED ON INDEX COMPOSED OF TWO OR MORE SECURITIES--INITIAL 
LISTING STANDARDS
    No change.
70004. SFPs BASED ON INDEX COMPOSED OF TWO OR MORE SECURITIES--
MAINTENANCE LISTING STANDARDS
    The Exchange will not open for trading SFPs, that are physically 
settled, based on an index composed of two or more securities with a 
new delivery month unless the underlying index:
    1. No change.
    2. Meets the following requirements:
    a.-i. No change.
Interpretation of Requirement 2.i. Regarding Procedures for Rebalancing
    [The date of determination for the mandatory annual rebalancing of 
an approximately equal dollar-weighted index underlying a physically 
settled security futures product as described in the first sentence of 
(i) will initially be the last trading day of the year, except that, if 
the Exchange has rebalanced such index on an interim basis as described 
in the second sentence of (i), any following annual rebalancing of such 
index will occur on the anniversary date of the interim rebalancing. 
New contracts issued on or after a date on which the corresponding 
index is rebalanced in accordance with (i) will be based on an index 
consisting of the original component securities, weighted applying the 
methodology described under (i) above on the basis of security prices 
on the rebalancing date. Outstanding contracts will not be affected by 
any rebalancing.]
    In the case of a physically settled SFP based on an approximately 
equal dollar-weighted index composed of one or more securities, each 
component security will be weighted equally based on its market price 
on the Selection Date, subject to rounding up or down the number of 
shares or receipts evidencing such security to the nearest multiple of 
100 shares or receipts.
    j.-l. No change.
* * * * *

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 has Listing Standards applicable to physically settled 
security futures products (``SFPs'') for NBIs and for single security 
products, including ETFs, TIRs, and shares of registered closed-end 
management investment companies (``Closed-End Fund'').\5\ The Exchange 
proposes to amend its Listing Standards to conform to current industry 
practices. In particular, the Exchange proposes to amend the current 
requirement that a security underlying a SFP, other than an ETF, TIR, 
or Closed-End Fund share, must have had an average daily trading volume 
of at least 109,000 shares or receipts evidencing the underlying 
security in each of the preceding 12 months to adopt a requirement, in 
conformance with current industry practice (and the standards for an 
ETFs, TIRs, and Closed-End Fund share), that such security must 
evidence total trading volume of at least 2,400,000 shares or receipts 
evidencing the underlying security in the preceding 12 months. Finally, 
the Exchange also proposes to adopt other minor or technical amendments 
to its Listing Standards to conform with industry practices, such as 
adjusting the market price per share of a security underlying a SFP to 
distinguish between a covered security as defined under Section 
18(b)(1)(A) of the Securities Act of 1933 and a security that is ``not 
covered.'' \6\
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    \5\ See Securities Exchange Act Release No. 46975 (December 9, 
2002), 67 FR 77297 (December 17, 2002) (SR-CME-2002-02).
    \6\ 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.

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

    Section 6(h)(3) of the Act \7\ 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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    \7\ 15 U.S.C. 78f(h)(3).
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    Clause (A) of Section 6(h)(3) of the Act \8\ requires that any 
security underlying a SFP be registered pursuant to Section 12 of the 
Act.\9\ 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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    \8\ 15 U.S.C. 78f(h)(3)(A).
    \9\ 15 U.S.C. 78l.
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    Clause (B) of Section 6(h)(3) of the Act \10\ 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

[[Page 39830]]

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.\11\ 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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    \10\ 15 U.S.C. 78f(h)(3)(B).
    \11\ 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 \12\ 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.\13\ 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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    \12\ 15 U.S.C. 78f(h)(3)(C).
    \13\ 15 U.S.C. 78o-3(a).
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    Clause (D) of Section 6(h)(3) of the Act \14\ 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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    \14\ 15 U.S.C. 78f(h)(3)(D).
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    Clause (E) of Section 6(h)(3) of the Act \15\ 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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    \15\ 15 U.S.C. 78f(h)(3)(E).
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    Clause (F) of Section 6(h)(3) of the Act \16\ 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 \17\ 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.\18\ 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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    \16\ 15 U.S.C. 78f(h)(3)(F).
    \17\ 15 U.S.C. 78o-3(a).
    \18\ 15 U.S.C. 78o-3(a).
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    Clause (G) of Section 6(h)(3) of the Act \19\ requires that each 
SFP be subject to the prohibition against dual trading in Section 4j of 
CEA \20\ and the rules and regulations thereunder or the provisions of 
Section 11(a) of the Act \21\ 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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    \19\ 15 U.S.C. 78f(h)(3)(G).
    \20\ 15 U.S.C. 4j.
    \21\ 15 U.S.C. 78k(a).
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    Further, the prohibition of dual trading in SFPs per Regulation 
Sec.  41.272 \22\ adopted pursuant to Section 4j(a) of CEA \23\ 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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    \22\ 17 CFR 41.27.
    \23\ 7 U.S.C. 6j(a).
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    Clause (H) of Section 6(h)(3) of the Act \24\ 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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    \24\ 15 U.S.C. 78f(h)(3)(H).
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    Clause (I) of Section 6(h)(3) of the Act \25\ 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.\26\ 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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    \25\ 15 U.S.C. 78f(h)(3)(I).
    \26\ 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 \27\ 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

[[Page 39831]]

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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    \27\ 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 \28\ 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.\29\ In 
particular, proposed CME Rule 71001.F. provides, in accordance with 
Regulation Sec.  41.25(a)(2) of CEA,\30\ 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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    \28\ 15 U.S.C. 78f(h)(3)(K).
    \29\ See SR-CME-2005-03.
    \30\ 17 CFR 41.25(a)(2).
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    Clause (L) of Section 6(h)(3) of the Act \31\ requires that the 
margin requirements for a SFP comply with the regulations prescribed 
pursuant to Section 7(c)(2)(B) of the Act.\32\ CME has margin rules in 
place.\33\ Thus, CME believes that its customer margin rules are 
consistent with the requirements of the Act.
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    \31\ 15 U.S.C. 78f(h)(3)(L).
    \32\ 15 U.S.C. 78g(c)(2)(B).
    \33\ 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.\34\
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    \34\ 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,\35\ in general, and furthers the 
objectives of Section 6(b)(5) of the Act,\36\ 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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    \35\ 15 U.S.C. 78f(b).
    \36\ 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.

[[Page 39832]]

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.\37\ 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.\38\
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    \37\ 15 U.S.C. 78s(b)(7).
    \38\ 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 
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-2005-01 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-2005-01. 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-2005-01 and should be submitted on or before August 1, 2005. 

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\39\
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    \39\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5-3620 Filed 7-8-05; 8:45 am]
BILLING CODE 8010-01-P