[Federal Register Volume 71, Number 54 (Tuesday, March 21, 2006)]
[Notices]
[Pages 14259-14265]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-4055]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISISON

[Release No. 34-53486; File No. SR-CBOT-2006-03]


Self-Regulatory Organization; Board of Trade of the City of 
Chicago, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Changes Relating to Listing Standards for Security Futures 
Products

March 14, 2006.
     Pursuant to Section 19(b)(7) of the Securities Exchange Act of 
1934 (``Act''),\1\ and Rule 19b-7 under the Act,\2\ notice is hereby 
given that on February 21, 2006, the Board of Trade of the City of 
Chicago, Inc. (``CBOT[supreg]'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rules 
described in Items I, II, and III below, which Items have been prepared 
by the CBOT. The Commission is publishing this notice to solicit 
comments on the proposed rules from interested persons. The CBOT also 
has filed the proposed rules with the Commodity Futures Trading 
Commission (``CFTC''), together with a written certification under 
Section 5c(c) of the Commodity Exchange Act (``CEA'') \3\ on February 
16, 2006.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(7).
    \2\ 17 CFR 240.19b-7.
    \3\ 7 U.S.C. 7a-2(c).
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Description of the Proposed Rules

    The CBOT is proposing to adopt listing standards and related 
regulations to permit the trading on the Exchange of physically-settled 
single security futures products, and the trading of security futures 
products based on narrow-based securities indices, in compliance with 
the requirements under Section 6(h)(3) of the Act \4\ and the criteria 
under Section 2(a)(1)(D)(i) of the CEA,\5\ as modified by joint orders 
of the Commission and the CFTC.\6\ The text of the proposed rule change 
is available on the CBOT's website (http://www.cbot.com), at the CBOT's 
principal office, and at the Commission's Public Reference Room.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(h)(3).
    \5\ 7 U.S.C. 2(a)(1)(D)(i).
    \6\ See Joint Order Granting the Modification of Listing 
Standards Requirements (American Depositary Receipts), Securities 
Exchange Act Release No. 44725 (August 20, 2001) and Joint Order 
Granting the Modification of Listing Standards Requirements 
(Exchange Traded Funds, Trust Issued Receipts, and Shares of Closed-
End Funds), Securities Exchange Act Release No. 46090 (June 19, 
2002), 67 FR 42760 (June 25, 2002).
---------------------------------------------------------------------------

    The CBOT's Listing Standards \7\ are, for the most part, identical 
to the sample listing standards (``Sample Listing Standards'') included 
in the Commission's Staff Legal Bulletin No. 15 (``SLB 15''),\8\ except 
that the CBOT's Listing Standards:
---------------------------------------------------------------------------

    \7\ The CBOT's Listing Standards are set forth in proposed CBOT 
Regulations 5719.01 and 5818.01.
    \8\ Commission, Division of Market Regulation, Staff Legal 
Bulletin No. 15: Listing Standards for Trading Security Futures 
Products (September 5, 2001) (available at http://www.sec.gov/interps/legal/mrslb15.htm).
---------------------------------------------------------------------------

     Reflect the modifications to the statutory listing 
standards requirements jointly adopted by the Commission and the CFTC 
with respect to shares of exchange-traded funds (``ETFs''), trust-
issued receipts (``TIRs''), shares of registered closed-end management 
investment companies (``Closed-End Fund Shares''), and American 
Depositary Receipts (``ADRs''); \9\
---------------------------------------------------------------------------

    \9\ See supra note 6.
---------------------------------------------------------------------------

     Permit share-weighted, approximately equal dollar-
weighted, and modified equal dollar-weighted methodologies for futures 
based on

[[Page 14260]]

narrow-based security indices, subject to applicable rebalancing 
requirements; \10\ and
---------------------------------------------------------------------------

    \10\ Proposed CBOT Regulations 5818.01(a)(2) and 
5818.01(b)(1)(B) contain listing requirements that relate to the 
initial listing standards and maintenance standards, respectively, 
for share-weighted, approximately equal dollar-weighted, and 
modified equal dollar-weighted narrow-based security indices, in 
addition to those based on other weighting methodologies. All of 
these weighting methodologies have been previously approved for use 
by other security futures exchanges.
---------------------------------------------------------------------------

     Contain certain provisions that reflect rule changes that 
have been filed by other security futures exchanges since the adoption 
of SLB 15, which vary from the Sample Listing Standards set forth in 
SLB 15.
    The Exchange is also proposing to adopt regulations addressing 
regulatory trading halts, position limits, and procedures for 
determining final settlement prices for security futures products, as 
required by Rule 6h-1 under the Act \11\ and CFTC Regulation 41.25.\12\
---------------------------------------------------------------------------

    \11\ 17 CFR 240.6h-1.
    \12\ 17 CFR 41.25.
---------------------------------------------------------------------------

    Proposed CBOT Regulations 431.07 and 431.08, while also referenced 
in Item II below, are not filed in this proposed rule change because 
they were the subjects of separate filings by the CBOT pursuant to Rule 
19b-4 under the Act.\13\
---------------------------------------------------------------------------

    \13\ See SR-CBOT-2006-01, filed with the Commission on March 3, 
2006.
---------------------------------------------------------------------------

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

    The CBOT has prepared statements concerning the purpose of, and 
basis for, the proposed rules, burdens on competition, and comments 
received from members, participants, and others. The text of these 
statements may be examined at the places specified in Item IV below. 
These statements are set forth in Sections A, B, and C below.

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

    The CBOT proposes to adopt contract specifications governing 
physically-settled single security futures products (``single stock 
futures'') and contract specifications governing security futures 
products based on narrow-based securities indices (``narrow-based stock 
index futures''), including proposed listing standards that comply with 
the requirements under Section 6(h)(3) of the Act \14\ and the criteria 
under Section 2(a)(1)(D)(i) of the CEA,\15\ as modified by joint orders 
of the Commission and the CFTC.\16\
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(h)(3).
    \15\ 7 U.S.C. 2(a)(1)(D)(i).
    \16\ See supra note 6.
---------------------------------------------------------------------------

    Section 6(h)(3) of the Act \17\ sets forth a number of requirements 
for listing standards applicable to security futures products. Among 
other things, that Section provides that such listing standards must 
(i) be no less restrictive than comparable listing standards for 
options traded on a national securities exchange \18\ and (ii) require 
that trading in security futures products not be readily susceptible to 
manipulation of the price of such products or of the underlying 
securities or options on such securities.\19\
---------------------------------------------------------------------------

    \17\ 15 U.S.C. 78f(h)(3).
    \18\ 15 U.S.C. 78f(h)(3)(C).
    \19\ 15 U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------

1. CBOT Listing Standards
    Commission staff published SLB 15,\20\ including the Sample Listing 
Standards (which were derived from typical listing standards used by 
exchanges trading options based on securities or securities indices), 
to provide guidance as to how an exchange would be able to comply with 
the foregoing requirements. SLB 15 also noted that different listing 
standards could also be consistent with the Act.
---------------------------------------------------------------------------

    \20\ See supra note 8.
---------------------------------------------------------------------------

    The CBOT's Listing Standards follow the Sample Listing Standards, 
subject to additional modifications relating to ETFs, TIRs, and Closed-
End Fund Shares; the establishment of additional weighting 
methodologies, identified under Item I above; and certain other rule 
changes that were filed with the Commission and the CFTC by OneChicago, 
LLC (``OneChicago'') \21\ and the CBOE Futures Exchange, LLC 
(``CFE''),\22\ which pertain to OneChicago's and CFE's respective 
listing standards for security futures. Therefore, the CBOT's Listing 
Standards as set forth herein do not contain any listing standards that 
have not already been reviewed by the Commission.
---------------------------------------------------------------------------

    \21\ See SR-OC-2002-04 (Securities Exchange Act Release No. 
47114 (December 31, 2002), 68 FR 837 (January 7, 2003)) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change by 
OneChicago, LLC Relating to Listing Standards for Security Futures 
Products). See also SR-OC-2003-01 (Securities Exchange Act Release 
No. 47356 (February 12, 2003), 68 FR 8064 (February 19, 2003)); SR-
OC-2003-04 (Securities Exchange Act Release No. 47445 (March 5, 
2003), 68 FR 11595 (March 11, 2003)); SR-OC-2003-06 (Securities 
Exchange Act Release No. 48191 (July 17, 2003), 68 FR 43555 (July 
23, 2003)); SR-OC-2003-08 (Securities Exchange Act Release No. 48660 
(October 20, 2003), 68 FR 61027 (October 24, 2003)); SR-OC-2004-02 
(Securities Exchange Act Release No. 50373 (September 14, 2004), 69 
FR 56470 (September 21, 2004)); and SR-OC-2005-02 (Securities 
Exchange Act Release No. 52180 (July 29, 2005), 70 FR 45464 (August 
5, 2005)).
    \22\ See SR-CFE-2005-01 (Securities Exchange Act Release No. 
52295 (August 18, 2005), 70 FR 49691 (August 24, 2005) (Notice of 
Filing and Immediate Effectiveness of Proposed Rule Change by CBOE 
Futures Exchange, LLC Relating to Its Listing Standards for Security 
Futures Products).
---------------------------------------------------------------------------

    The CBOT's Listing Standards permit the CBOT to trade physically-
settled single stock futures. The CBOT's Listing Standards also permit 
the CBOT to trade either cash-settled or physically-settled narrow-
based stock index futures on the following types of stock indices: 
capitalization-weighted, modified capitalization-weighted, price-
weighted, share-weighted, equal dollar-weighted, approximately equal 
dollar-weighted, and modified equal dollar-weighted. The modifications 
to SLB 15, including the modifications that permit the CBOT to list 
approximately equal dollar-weighted, modified equal dollar-weighted, 
and share-weighted narrow-based stock index futures, are explained in 
further detail below.
2. Modifications of SLB 15
a. Modification relating to Shares of ETFs, TIRs, and Closed-End Fund 
Shares
    The modifications included in the CBOT's Listing Standards that 
relate to shares of ETFs, TIRs, and Closed-End Fund Shares reflect the 
modifications to the statutory listing standards requirements adopted 
by the Commission and the CFTC subsequent to the publication of SLB 
15.\23\ These standards are incorporated in proposed CBOT Regulation 
5719.01.
---------------------------------------------------------------------------

    \23\ See supra note 6.
---------------------------------------------------------------------------

b. Modification relating to Additional Weighting Methodologies
    The modifications that relate to narrow-based stock index futures: 
(i) Are intended to allow the CBOT to provide for additional weighting 
methodologies for the underlying indices, including approximately equal 
dollar-weighted, modified equal dollar-weighted, and share-weighted 
methodologies; and (ii) are designed to enhance the usefulness and 
effectiveness of narrow-based stock index futures in connection with 
hedging, arbitrage, and other investment strategies.
    The proposed approximately equal dollar-weighted methodology 
contemplates a narrow-based stock index consisting of component 
securities in increments that are no less than 100 shares or receipts, 
which corresponds to customary increments for transactions in the 
markets for those securities. For this reason, rounding will be a 
necessary step in the determination of the initial index composition 
and any

[[Page 14261]]

subsequent rebalancing. An approximately equal dollar-weighted index 
will be rebalanced annually on December 31 of each year if the notional 
value of the largest component is at least twice the notional value of 
the smallest component for 50% or more of the trading days in the three 
months prior to December 31 of each year. The CBOT will also have the 
ability to rebalance an approximately equal dollar-weighted narrow-
based security index on a quarterly basis at its discretion.
    A modified equal dollar-weighted index is designed to be a fair 
measurement of a particular industry or sector without assigning an 
excessive weight to one or more index components that have a large 
market capitalization relative to other index components. In a modified 
equal dollar-weighted index, each component security represents a pre-
determined weighting percentage of the entire index. Each security will 
be assigned a weight that takes into account the relative market 
capitalization of the securities comprising the index. A modified equal 
dollar-weighted index underlying a narrow-based stock index future must 
be rebalanced on a quarterly basis.
    A share-weighting methodology involves calculating the index by 
multiplying the price of each component security by an adjustment 
factor. The adjustment factor will be chosen to reflect the investment 
objective deemed appropriate by the index designer and will be 
published by the Exchange as part of the contract specifications for 
the narrow-based stock index future. The value of the index will be 
calculated by adding the weight of each component security and dividing 
the total by an index divisor, calculated to yield a benchmark index 
level as of a particular date. Share-weighted indices will not be 
rebalanced to reflect changes in the numbers of outstanding shares of 
their component securities.
    The CBOT's proposed Listing Standards also provide that an index 
underlying a narrow-based stock index future, regardless of the 
weighting methodology, may be rebalanced on an interim basis if 
warranted as a result of extraordinary changes in the relative values 
of the component securities. To the extent investors with open 
positions must rely on the continuity of a narrow-based stock index 
future, outstanding contracts will not be affected by rebalancings.
    The proposed Listing Standards for narrow-based stock index futures 
based on indices that are approximately equal dollar-weighted, modified 
equal dollar-weighted, and share-weighted, which are reflected in 
proposed CBOT Regulations 5818.01(a)(2) and (b)(1)(B), are identical to 
the listing standards applicable in the case of indices based on these 
same weighting methodologies that are set forth in OneChicago Rules 
1006(a)(2) and (b)(1)(B).\24\
---------------------------------------------------------------------------

    \24\ See SR-OC-2005-02, supra note 21.
---------------------------------------------------------------------------

c. Modification of SLB 15 I(A)(vi)
    The CBOT is adopting the same initial listing standard contained in 
OneChicago Rule 906(a)(6) \25\ and Section A(1)(vi) of CFE Policy and 
Procedure VIII,\26\ which would permit the CBOT to list a single stock 
future on an underlying security that had trading volume of at least 
2,400,000 shares in the preceding 12 months. This standard is 
incorporated in proposed CBOT Regulation 5719.01(a)(6).
---------------------------------------------------------------------------

    \25\ See SR-OC-2004-02, supra note 21.
    \26\ See SR-CFE-2005-01, supra note 22.
---------------------------------------------------------------------------

d. Modification of SLB 15 I(A)(vii)
    The CBOT is proposing to adopt initial listing standards which 
would permit a single stock future to be listed on a ``covered 
security,'' as defined under Section 18(b)(1) of the Securities Act of 
1933,\27\ that has had a market price of at least $3.00 for the five 
consecutive business days prior to the date on which the single stock 
futures contract is listed by the Exchange. The market price of the 
underlying security would be measured by the closing price reported in 
the primary market in which the underlying security is traded. Proposed 
CBOT regulations would also require that an underlying security that is 
not a ``covered security'' must meet the requirement that it have a 
market price of $7.50 for the majority of the business days for the 
three calendar months preceding selection. These standards are 
reflected in proposed CBOT Regulations 5719.01(a)(8) and (a)(9) and are 
the same as those standards contained in OneChicago Rule 906(a)(8) and 
(a)(9) \28\ and Section A(1)(viii) and A(1)(ix) of CFE Policy and 
Procedure VIII.\29\
---------------------------------------------------------------------------

    \27\ 15 U.S.C. 77r(b)(1).
    \28\ See SR-OC-2003-01, supra note 21.
    \29\ See SR-CFE-2005-01, supra note 22.
---------------------------------------------------------------------------

e. Modification of SLB 15 II(A)(iv)
    The CBOT is adopting the same maintenance standards implemented in 
OneChicago Rule 906(b)(1)(E) \30\ and in Section B(1)(v) of CFE Policy 
and Procedure VIII,\31\ pursuant to which the CBOT would not open for 
trading a new delivery month for a single stock futures contract if the 
market price per share of the underlying security closed below $3.00 on 
the previous day to the expiration of the nearest expiring contract on 
the underlying security. The market price per share of the underlying 
security would be determined by the closing price reported in the 
primary market in which the underlying security is traded. This 
standard is incorporated in proposed CBOT Regulation 5719.01(b)(1)(E).
---------------------------------------------------------------------------

    \30\ See SR-OC-2003-04 (as amended by SR-OC-2003-08), supra note 
21.
    \31\ See SR-CFE-2005-01, supa note 22.
---------------------------------------------------------------------------

3. Section 6(h)(3) Requirements
    Section 6(h)(3) of the Act \32\ contains detailed requirements for 
listing standards and conditions for trading applicable to security 
futures products. Set forth below is a summary of each such requirement 
or condition, followed by a brief explanation of how the CBOT will 
comply with it, whether by particular provisions in the CBOT's listing 
standards or otherwise.
---------------------------------------------------------------------------

    \32\ 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------

    Section 6(h)(3)(A) of the Act \33\ requires that, except as 
otherwise provided in a rule, regulation, or order issued jointly by 
the Commission and CFTC pursuant to Section 6(h)(4) of the Act,\34\ any 
security underlying a security futures product, including each 
component security of a narrow-based security index, must be registered 
pursuant to Section 12 of the Act.\35\ These requirements are 
incorporated in proposed CBOT Regulations 5704.01, 5719.01(a)(2), 
5719.01(b)(1)(A), 5804.01, 5818.01(a)(2)(B) and 5818.01(b)(1)(B)(i).
---------------------------------------------------------------------------

    \33\ 15 U.S.C. 78f(h)(3)(A).
    \34\ 15 U.S.C. 78f(h)(4).
    \35\ 15 U.S.C. 78l.
---------------------------------------------------------------------------

    Section 6(h)(3)(B) of the Act \36\ requires that, if a security 
futures product is not cash-settled, the market on which the security 
futures product is traded must have arrangements in place with a 
registered clearing agency for the payment and delivery of the 
securities underlying the security futures product. Pursuant to CBOT 
Regulations 5719.01(a) and 5818.01(a)(2), the CBOT will not list any 
physically-settled security futures product until it has finalized such 
arrangements and provided the Commission with appropriate notice 
regarding the nature of such arrangements through the filing of a Form 
19b-7, pursuant to Section 19(b)(7) of the Act \37\ and Rule 19b-7 
under the Act.\38\
---------------------------------------------------------------------------

    \36\ 15 U.S.C. 78f(h)(3)(B).
    \37\ 15 U.S.C. 78s(b)(7).
    \38\ 17 CFR 240.19b-7.
---------------------------------------------------------------------------

    Section 6(h)(3)(C) of the Act \39\ requires that the listing 
standards for security futures products must be no less restrictive 
than comparable listing

[[Page 14262]]

standards for options traded on a national securities exchange or 
national securities association registered pursuant to Section 15A(a) 
of the Act.\40\ For the reasons discussed under Item II.A.1 above, 
notwithstanding specified differences between the Sample Listing 
Standards and the CBOT's Listing Standards, the CBOT believes that the 
Listing Standards set forth in its proposed CBOT Regulations 5719.01 
and 5818.01 are no less restrictive than comparable listing standards 
for exchange-traded options.
---------------------------------------------------------------------------

    \39\ 15 U.S.C. 78f(h)(3)(C).
    \40\ 15 U.S.C. 78o-3(a).
---------------------------------------------------------------------------

    Section 6(h)(3)(D) of the Act \41\ provides that, except as 
otherwise provided in a rule, regulation, or order issued jointly by 
the Commission and CFTC pursuant to Section 6(h)(4) of the Act,\42\ a 
security futures product must be based upon common stock or other 
equity securities that the Commission and CFTC jointly determine 
appropriate. The Commission and CFTC have jointly modified the listing 
standards, under Section 6(h)(4) of the Act,\43\ to permit security 
futures products to be based upon ADRs, ETFs, TIRs, and Closed-End Fund 
Shares.\44\ Proposed CBOT Regulations 5704.01, 5719.01(a)(1), 
5719.01(b)(1), 5804.01, 5818.01(a)(2)(C), and 5818.01(b)(1)(B)(ii) 
limit CBOT security futures products to those that are based on these 
permissible underlying securities.
---------------------------------------------------------------------------

    \41\ 15 U.S.C. 78f(h)(3)(D).
    \42\ 15 U.S.C. 78f(h)(4).
    \43\ Id.
    \44\ See supra note 6.
---------------------------------------------------------------------------

    Section 6(h)(3)(E) of the Act \45\ requires that security futures 
products must be cleared by a clearing agency that has in place 
provisions for linked and coordinated clearing with other clearing 
agencies that clear security futures products, which permits a security 
futures product to be purchased on one market and offset on another 
market that trades the same product. Section 6(h)(7) of the Act \46\ 
defers this requirement until the ``compliance date,'' as defined in 
that Section. The CBOT expects that its Clearing Services Provider, 
Chicago Mercantile Exchange, Inc. (``CME''), will have provisions in 
place to comply with Section 6(h)(3)(E) \47\ as of the compliance date.
---------------------------------------------------------------------------

    \45\ 15 U.S.C. 78f(h)(3)(E).
    \46\ 15 U.S.C. 78f(h)(7).
    \47\ 15 U.S.C. 78f(h)(3)(E).
---------------------------------------------------------------------------

    Section 6(h)(3)(F) of the Act \48\ 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 
\49\ may effect transactions in security futures products. CBOT members 
that are notice-registered broker-dealers, for the purpose of effecting 
transactions in security futures, are bound by the applicable sales 
practice rules of the National Futures Association (``NFA''). The NFA 
is registered with the Commission as a limited purpose national 
securities association, and, as such, its sales practice rules relating 
to security futures products are comparable to those of a national 
securities association registered pursuant to Section 15A(a) of the 
Act.\50\
---------------------------------------------------------------------------

    \48\ 15 U.S.C. 78f(h)(3)(F).
    \49\ 15 U.S.C. 78o-3(a).
    \50\ Id.
---------------------------------------------------------------------------

    Section 6(h)(3)(G) of the Act \51\ requires that security futures 
products be subject to the dual trading prohibition contained in 
Section 4j of the CEA \52\ and rules and regulations thereunder (or 
Section 11(a) of the Act \53\ and rules and regulations thereunder), 
unless otherwise permitted. Pursuant to CFTC Regulation 
41.27(a)(5),\54\ Section 4j of the CEA \55\ and CFTC Regulation 41.27 
\56\ promulgated thereunder do not apply to the CBOT because the CBOT 
does not intend to list any security futures products in the open 
auction environment and the CBOT's electronic trading system does not 
provide market participants with a time or place advantage or the 
ability to override a predetermined algorithm.
---------------------------------------------------------------------------

    \51\ 15 U.S.C. 78f(h)(3)(G).
    \52\ 7 U.S.C. 6j.
    \53\ 15 U.S.C. 78k(a).
    \54\ 17 CFR 41.27(a)(5).
    \55\ 7 U.S.C. 6j.
    \56\ 17 CFR 41.27.
---------------------------------------------------------------------------

    Section 6(h)(3)(H) of the Act \57\ requires that trading in 
security futures products must not be readily susceptible to 
manipulation of the price of such security futures products, 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. The CBOT's Listing Standards contained 
in proposed CBOT Regulations 5719.01 and 5818.01, as well as the other 
proposed CBOT Regulations in Chapters 57 and 58, are designed to ensure 
that security futures products traded on the Exchange will not be 
readily subject to price manipulation, nor to being used in the 
manipulation of the price of any underlying securities. CBOT Rule 
502.00 generally prohibits market manipulation with respect to 
commodities, securities, and futures and options contracts.\58\
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78f(h)(3)(H).
    \58\ CBOT Rule 502.00 (Market Manipulation) states that:
    Any manipulation of prices of, or any attempt to manipulate or 
corner the market in, any commodity, security, or futures or options 
contract is prohibited. Purchases or sales of commodities, 
securities, or futures or options contracts, or offers to purchase 
or sell commodities, securities, or futures or options contracts, 
for the purpose of upsetting the equilibrium of the market or 
creating a condition in which prices do not or will not reflect fair 
market values, are prohibited, and any person who makes or assists 
in making such purchase or sale or offers to purchase or sell with 
knowledge of the purpose thereof, or who, with such knowledge 
assists in carrying out any plan or scheme for the making of such 
purchases or sales or offers to purchase or sell, shall be deemed to 
have engaged in an act inconsistent with just and equitable 
principles of trade and an act detrimental to the interest or 
welfare of the Exchange.
---------------------------------------------------------------------------

    The position limit standards set forth in proposed CBOT Regulations 
5711.01 and 5810.01 (``Position Limits'') are also designed to prevent 
market manipulation with respect to physically-settled single stock 
futures and physically-settled narrow-based stock index futures, 
respectively, through the adoption of position limits in accordance 
with CFTC Regulation 41.25.\59\ With respect to cash-settled narrow-
based stock index futures, proposed CBOT Regulation 5810.01 adopts the 
position limit standards set forth in OneChicago Rule 1002(e)(2) \60\ 
and CFE Rule 1902(e) \61\ and applies those standards to all CBOT cash-
settled narrow-based stock index futures.\62\ Under proposed CBOT 
Regulation 5810.01, the CBOT will calculate two numbers: The Market Cap 
Position Limit and the SSF Position Limit. The Market Cap Position 
Limit is based on the market capitalization of each narrow-based stock 
index future and the notional value compared to the market 
capitalization of the CME's position limit for its futures contract on 
the Standard & Poor's (``S&P'') 500 Index. The SSF Position Limit is 
based on the current position limit permitted for single stock futures 
under CFTC Regulation 41.25.\63\ The CBOT will impose a position limit 
on each cash-settled narrow-based stock index future equal to the lower 
of the Market Cap Position Limit and the SSF Position Limit, rounded to 
the nearest multiple of 1,000 contracts; provided, however, that if the 
lower of the two limits is less than 500 but not less than 400, the 
position limit for such future will be rounded up to 1,000 contracts.
---------------------------------------------------------------------------

    \59\ 17 CFR 41.25.
    \60\ See SR-OC-2003-06, supra note 21.
    \61\ See SR-CFE-2005-01, supra note 22.
    \62\ Consistent with CFTC Regulation 41.25, position limits 
apply to positions in any cash-settled narrow-based stock index 
futures held during the last five trading days of an expiring 
contract.
    \63\ 17 CFR 41.25.
---------------------------------------------------------------------------

    To calculate the Market Cap Position Limit, the CBOT will determine 
the market capitalization of the S&P 500 Index (as of the selection 
date for the

[[Page 14263]]

component securities in the index underlying the narrow-based stock 
index future), then will calculate the notional value of a position at 
the limit of CME's S&P 500 Index futures contract (``S&P 500 Notional 
Value Limit'') \64\ and then will divide the first amount by the second 
to determine the market capitalization ratio (``Market Cap 
Ratio'').\65\ The CBOT then will determine the market capitalization of 
the index underlying the narrow-based stock index future (``Stock Index 
Market Cap'') \66\ and the notional value of the index underlying the 
narrow-based stock index future (``Notional Value'').\67\ To calculate 
the Market Cap Position Limit, the CBOT will divide the Stock Index 
Market Cap by the Notional Value multiplied by the Market Cap 
Ratio.\68\
---------------------------------------------------------------------------

    \64\ The speculative position limit for CME's S&P 500 Index 
futures contract is 20,000 contracts (in all months combined) and 
the contract multiplier is $250. The S&P 500 Notional Value Limit = 
Index * 20,000 * 250.
    \65\ Market Cap Ratio = Market Capitalization of S&P 500 Index/
S&P 500 Notional Value Limit.
    \66\ The Stock Index Market Cap is calculated by adding the 
market capitalization of each stock comprising the underlying 
narrow-based security index.
    \67\ Notional Value = Level of the Index underlying the narrow-
based stock index future * contract multiplier.
    \68\ Market Cap Position Limit = Stock Index Market Cap/
(Notional Value * Market Cap Ratio).
---------------------------------------------------------------------------

    To calculate the SSF Position Limit for a narrow-based stock index 
future, the CBOT will first calculate its Notional Value in the same 
manner described above.\69\ Then, for each component security in the 
index underlying the narrow-based stock index future, the CBOT will 
multiply the index weight of the component security \70\ by the 
Notional Value to determine the security's proportion of the narrow-
based stock index future (``Share Weighting''). The CBOT will then 
divide each security's Share Weighting by its price to calculate the 
number of shares of that security represented in the narrow-based stock 
index futures contract (``Implied Shares''). The CBOT then, for each 
component security in the index underlying the narrow-based stock index 
future, will divide its Implied Shares by 100 to obtain the implied 
number of 100-share contracts of each component security in each 
narrow-based stock index futures contract. The CBOT then will divide 
the applicable single stock futures contract position limit permitted 
under CFTC Regulation 41.25(a)(3) \71\ (either 13,500 or 22,500 
contracts) for each component security by the number of implied 100-
share contracts. This equals the number of narrow-based stock index 
futures contracts that could be held without exceeding the speculative 
position limit on a futures contract on that component security 
(``Implied SSF Speculative Limit''). If a component security qualifies 
for position accountability under CFTC Regulation 41.25(a)(3),\72\ that 
security would be ignored for purposes of this calculation. After 
calculating the Implied SSF Speculative Limit for each security in the 
index underlying the narrow-based stock index future, the CBOT will 
identify the lowest Implied SSF Speculative Limit as the SSF Position 
Limit for that narrow-based stock index future.
---------------------------------------------------------------------------

    \69\ See supra note 64.
    \70\ Index weight of the component security = (assigned shares * 
price) of the component security/the sum of (assigned shares * 
price) for each component security.
    \71\ 17 CFR 41.25(a)(3).
    \72\ Id.
---------------------------------------------------------------------------

    The CBOT's proposed CBOT Regulations 5712.01 and 5811.01 regarding 
regulatory trading halts, and proposed CBOT Regulations 5713.01, 
5714.01, 5812.01, and 5813.01 regarding settlement prices, implement 
the requirements contained in Rule 6h-1 under the Act \73\ relating to 
regulatory halts and settlement with respect to security futures 
products.
---------------------------------------------------------------------------

    \73\ 17 CFR 240.6h-1.
---------------------------------------------------------------------------

    Proposed CBOT Regulation 5818.01(a)(2)(P) provides that if a 
narrow-based stock index future is cash-settled, it must be designated 
as AM-settled, which mirrors OneChicago Rule 1006(a)(2)(P).\74\
---------------------------------------------------------------------------

    \74\ See SR-OC-2005-02, supra note 21.
---------------------------------------------------------------------------

    Proposed CBOT Regulation 5813.01 incorporates the special 
procedures for determining the final settlement price of cash-settled 
narrow-based stock index futures, which are required by Rule 6h-1(b) 
under the Act \75\ and CFTC Regulation 41.25(b) \76\ and mirrors 
OneChicago Rule 1002(i)(2) \77\ and CFE Rule 1902(i).\78\ Under 
proposed CBOT Regulation 5813.01, a special opening quotation of the 
relevant index underlying the cash-settled narrow-based stock index 
future will be derived from the sum of the opening prices \79\ of each 
component stock. When all of the component stocks have opened, the 
final special opening quotation will be calculated and disseminated.
---------------------------------------------------------------------------

    \75\ 17 CFR 240.6h-1(b).
    \76\ 17 CFR 41.25(b).
    \77\ See SR-OC-2003-06, supra note 21.
    \78\ See SR-CFE-2005-01, supra note 22.
    \79\ Consistent with Rule 6h-1(a)(1) under the Act, 17 CFR 
240.6h-1(a)(1), and CFTC Regulation 41.1(j), 17 CFR 41.1(j), 
proposed CBOT Regulation 5813.01(c)(i) defines ``opening price'' as 
follows:
    ``Opening price'' means the official price at which a security 
opened for trading during the regular trading session of the 
national securities exchange or national securities association that 
lists the security. If the security is not listed on a national 
securities exchange or a national securities association, then 
``opening price'' shall mean the price at which a security opened 
for trading on the primary market for the security. If a component 
security is an ADR traded on a national securities exchange or 
national securities association, the opening price for the ADR would 
be derived from the national securities exchange or national 
securities association that lists it.
---------------------------------------------------------------------------

    If the price of one or more of the component securities is not 
readily available \80\ on the day scheduled for determination of the 
final settlement price, the price of the component security or 
securities shall be based on the next available opening price of that 
security, unless the Exchange determines that one or more component 
securities are not likely to open within a reasonable time. If the 
Exchange makes such a determination, the price of the relevant 
component security or securities for purposes of calculating the final 
settlement price will be the last trading price of the security or 
securities during the most recent regular trading session for such 
security or securities. Proposed CBOT Regulation 5813.01(d) also 
provides that the CBOT Regulation shall not be used to calculate the 
final settlement price of a cash-settled narrow-based stock index 
future if the Exchange's Clearing Services Provider fixes the final 
settlement price in accordance with its rules and as permitted under 
Rule 6h-1(b)(3) under the Act \81\ and CFTC Regulation 41.25(b)(3).\82\
---------------------------------------------------------------------------

    \80\ Under proposed CBOT Regulation 5813.01(c)(iv), the price of 
a security is ``not readily available'' if the national securities 
exchange or national securities association that lists it does not 
open on the day scheduled for determination of the final settlement 
price, or if the security does not trade on the listing national 
securities exchange or national securities association during the 
regular trading session.
    \81\ 17 CFR 240.6h-1(b)(3).
    \82\ 17 CFR 41.25(b)(3).
---------------------------------------------------------------------------

    Section 6(h)(3)(I) of the Act \83\ requires that procedures be in 
place for coordinated surveillance among the market on which a security 
futures product is traded, any market on which any security underlying 
the security futures product is traded, and other markets on which 
related securities are traded to detect manipulation and insider 
trading. Coordinated surveillance with respect to security futures 
products is addressed in the Listing Standards in proposed CBOT 
Regulations 5719.01(a)(10), 5719.01(b)(1)(F), 5818.01(a)(2)(G), and 
5818.01(b)(1)(B)(vi). CBOT Regulation 190.01 sets forth the Exchange's 
general authority to enter into agreements for

[[Page 14264]]

regulatory cooperation.\84\ The CBOT is an affiliate member of the 
Intermarket Surveillance Group (``ISG'') and has signed the following 
agreements: (1) An Agreement to Share Market Surveillance and 
Regulatory Information between the CBOT and the full members of ISG; 
(2) the Agreement to Share Market Surveillance and Regulatory 
Information between the CBOT and the affiliate members of ISG; and (3) 
the Addendum for Security Futures Products to agreements between the 
full members of ISG and the affiliate members of ISG trading security 
futures products.
---------------------------------------------------------------------------

    \83\ 15 U.S.C. 78f(h)(3)(I).
    \84\ CBOT Regulation 190.01 (Regulatory Cooperation) states 
that:
    The Exchange may from time to time enter into such agreements 
with domestic or foreign self-regulatory organizations, 
associations, boards of trade, clearing organizations, and their 
respective regulators providing for the exchange of information and 
other forms of mutual assistance for financial surveillance, routine 
audits, market surveillance, investigative, enforcement and other 
regulatory purposes as the Exchange may consider necessary or 
appropriate or as the Commodity Futures Trading Commission may 
require. The Exchange is authorized to provide information to any 
such organization, association, board of trade, clearing 
organization or regulator that is a party to an information sharing 
agreement with the Exchange, in accordance with the terms and 
subject to the conditions set forth in such agreement.
---------------------------------------------------------------------------

    Section 6(h)(3)(J) of the Act \85\ requires that a market on which 
security futures products are traded must have audit trails that are 
necessary or appropriate to facilitate the coordinated surveillance 
addressed in the preceding paragraph. The CBOT utilizes the LIFFE 
CONNECT[reg] software, pursuant to a license agreement, to power e-
cbot[reg], the Exchange's electronic trading system. The e-cbot system 
creates an electronic transaction history database that contains 
information with respect to all orders, whether executed or not, and 
resulting transactions on the Exchange. The information recorded with 
respect to each order includes: time received, terms of the order, 
order type, instrument and contract month, price, quantity, account 
type, account designation, e-cbot User ID, and clearing firm. This 
information enables the CBOT to trace each order back to the clearing 
firm by or through which it was submitted. If any question arises as to 
the source of an order prior to submission by or through a clearing 
firm, the CBOT will request that the clearing firm provide an 
electronic or other record of the order.
---------------------------------------------------------------------------

    \85\ 15 U.S.C. 78f(h)(3)(J).
---------------------------------------------------------------------------

    For orders that cannot be immediately entered into the e-cbot 
system, and therefore will not be recorded electronically at the time 
they are placed, CBOT Regulation 9B.11 (Order Entry) requires that the 
member or Registered User receiving the order must make a record of the 
order including the order instructions, account designation, date, time 
of receipt, and any other information that is required by the 
Exchange.\86\ CBOT Regulation 9B.18 (Records of Transactions Effected 
Through the e-cbot System) requires that all written orders and any 
other original records pertaining to orders entered through the e-cbot 
system must be retained for five years.\87\
---------------------------------------------------------------------------

    \86\ CBOT Regulation 9B.11 (Order Entry) states that:
    (c) It shall be the duty of each member or Registered User to: 
(1) submit orders through the e-cbot system under his registered e-
cbot User ID and (2) input for each order the price, quantity, 
product, expiration month, correct CTI code and appropriate account 
designation and, for options, put or call and strike price. A 
suspense account may be used at the time of order entry provided 
that a contemporaneous written record of the order, with the correct 
account designation, is made, time-stamped and maintained in 
accordance with CBOT Regulation 9B.18, and provided that the correct 
account designation is entered into the clearing system prior to the 
end of the trading day. A suspense account may also be used at the 
time of order entry for bunched orders that are eligible for post-
trade allocation, and are executed pursuant to and in accordance 
with CFTC Regulation 1.35(a-1)(5).
    (d) With respect to orders received by a member or Registered 
User which are immediately entered into the e-cbot system, no 
separate record need be made. However, if a member or Registered 
User receives an order that is not immediately entered into the e-
cbot system, a record of the order including the order instructions, 
account designation, date, time of receipt and any other information 
that is required by the Exchange must be made. The order must be 
entered into the e-cbot system when it becomes executable.
    \87\ CBOT Regulation 9B.18 (Records of Transactions Effected 
Through the e-cbot System) provides that ``[a]ll written orders and 
any other original records pertaining to orders entered through the 
e-cbot system must be retained for five years. For orders entered 
into the e-cbot system immediately upon receipt, the data contained 
in the e-cbot system shall be deemed the original records of the 
transaction.''
---------------------------------------------------------------------------

    The Exchange's sophisticated electronic surveillance system 
facilitates the analysis of trading data to identify possible 
violations with respect to both customer and market abuse. The Exchange 
retains all audit trail data for a period of five years in compliance 
with CFTC Regulation 1.31(a)(1).\88\
---------------------------------------------------------------------------

    \88\ 17 CFR 1.31(a)(1).
---------------------------------------------------------------------------

    Section 6(h)(3)(K) of the Act \89\ requires that an exchange on 
which security futures products are traded must have in place 
procedures to coordinate trading halts with any market on which any 
security underlying such security futures products are traded and other 
markets on which any related securities are traded. The CBOT's proposed 
CBOT Regulation 5712.01 requires the CBOT to halt trading of a security 
futures product based on a single security during any regulatory halt 
(as defined in CFTC Regulation 41.1(1) \90\ and Rule 6h-1(a)(3) under 
the Act \91\) imposed on the underlying security. Proposed CBOT 
Regulation 5811.01 also requires the CBOT to halt trading of a security 
futures product based on a narrow-based stock index during any 
regulatory halt of one or more underlying securities that constitute 
50% or more of the market capitalization of the narrow-based stock 
index. The CBOT believes that these proposed regulations comply with 
Section 6(h)(3)(K) of the Act \92\ and Rule 6h-1(c) \93\ thereunder.
---------------------------------------------------------------------------

    \89\ 15 U.S.C. 78f(h)(3)(K).
    \90\ 17 CFR 41.1(l).
    \91\ 17 CFR 240.6h-1(a)(3).
    \92\ 15 U.S.C. 78f(h)(3)(K).
    \93\ 17 CFR 240.6h-1(c).
---------------------------------------------------------------------------

    Section 6(h)(3)(L) of the Act \94\ requires that security futures 
margin requirements comply with the regulations prescribed under 
Section 7(c)(2)(B) of the Act.\95\ The CBOT believes that its proposed 
CBOT Regulations 431.07 (Customer Margins for Security Futures 
Positions Held in Futures Accounts) and 431.08 (Acceptable Margin for 
Security Futures and Treatment of Undermargined Accounts), which have 
been filed with the Commission \96\ pursuant to Section 19(b)(2) of the 
Act,\97\ together with a written certification under Section 5c(c) of 
the CEA,\98\ are consistent with the requirements of the Act regarding 
customer margin.
---------------------------------------------------------------------------

    \94\ 15 U.S.C. 78f(h)(3)(L).
    \95\ 15 U.S.C. 78g(c)(2)(B).
    \96\ See SR-CBOT-2006-01, supra note 13.
    \97\ 15 U.S.C. 78s(b)(2).
    \98\ 7 U.S.C. 7a-2(c)(1).
---------------------------------------------------------------------------

    Proposed Chapters 57 and 58 of the CBOT Rulebook contain general 
specifications for single stock futures and narrow-based stock index 
futures, respectively. Specific terms applicable to particular single 
stock futures or narrow-based stock index futures will be provided in 
Specifications Supplements, described in proposed CBOT Regulations 
5703.01, 5718.01, 5803.01, and 5817.01. This is the same approach set 
forth in CFE Rules 1802(a), 1806, 1902(a), and 1906.\99\
---------------------------------------------------------------------------

    \99\ See SR-CFE-2005-01, supra at note 22.
---------------------------------------------------------------------------

    For the reasons discussed above, the CBOT submits that the CBOT's 
Listing Standards satisfy the requirements set forth in Section 6(h)(3) 
of the Act.\100\
---------------------------------------------------------------------------

    \100\ 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------

4. Statutory Basis
    The Exchange has filed these proposed regulations pursuant to 
Section 19(b)(7) of the Act.\101\ The CBOT believes the CBOT's Listing

[[Page 14265]]

Standards are authorized by, and consistent with, Section 6(b)(5) of 
the Act,\102\ because they are designed to prevent fraudulent and 
manipulative acts and practices, to promote just and equitable 
principles of trade, and to protect investors and the public interest.
---------------------------------------------------------------------------

    \101\ 15 U.S.C. 78s(b)(7).
    \102\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOT does not believe that the proposed regulations will impose 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act. Since the proposed regulations, 
in conjunction with other related regulatory filings being made by the 
CBOT, will permit the CBOT to become authorized to provide a trading 
venue for security futures, these regulations will serve to enhance and 
promote competition by allowing an additional exchange to list and 
trade security futures.

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

    The CBOT neither solicited nor received any written comments on the 
proposed regulations.

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

    Pursuant to Section 19(b)(7)(B) of the Act,\103\ the proposed 
regulations became effective on February 21, 2006.\104\ Within 60 days 
of the date of effectiveness of the proposed regulations, the 
Commission, after consultation with the CFTC, may summarily abrogate 
the proposed regulations and require that the proposed regulations be 
re-filed in accordance with the provisions of Section 19(b)(1) of the 
Act.\105\
---------------------------------------------------------------------------

    \103\ 15 U.S.C. 78s(b)(7)(B).
    \104\ The CBOT filed the proposed regulations with the CFTC, 
together with a written certification under Section 5c(c) of the 
CEA, 7 U.S.C. 7a-2(c), on February 16, 2006.
    \105\ 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-CBOT-2006-03 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOT-2006-03. 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the CBOT. All comments received will be posted 
without change; the Commission does not edit identifying personal 
information from submissions. You should submit only information that 
you wish to make available publicly. All submissions should refer to 
File No. SR-CBOT-2006-03 and should be submitted on or before April 11, 
2006.

    For the Commission by the Division of Market Regulation, 
pursuant to delegated authority.\106\
---------------------------------------------------------------------------

    \106\ 17 CFR 200.30-3(a)(75).
---------------------------------------------------------------------------

Nancy M. Morris,
Secretary.
 [FR Doc. E6-4055 Filed 3-20-06; 8:45 am]
BILLING CODE 8010-01-P