[Federal Register Volume 71, Number 73 (Monday, April 17, 2006)]
[Notices]
[Pages 19771-19774]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-5611]



[[Page 19771]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53629; File No. SR-CBOT-2006-02]


Self-Regulatory Organizations; Board of Trade of the City of 
Chicago, Inc.; Notice of Filing and Order Granting Accelerated Approval 
to a Proposed Rule Change Relating to Security Futures Market Maker 
Registration Policy and Procedures

April 10, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 16, 2006, the Board of Trade of the City of Chicago, Inc. 
(``CBOT'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the CBOT. 
The Commission is publishing this notice and order to solicit comments 
on the proposed rule change from interested persons and to grant 
accelerated approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOT proposes to adopt a new Security Futures Market Maker 
Registration Policy and Procedures. The text of the proposed rule 
change appears below. New language is in italics.
* * * * *

Chicago Board of Trade Security Futures Market Maker

Registration Policy and Procedures

Security Futures Market Maker Program

    Pursuant to CBOT[supreg] Rule 225.00, the Exchange has adopted a 
security futures market maker program under which an individual member 
or member firm (each referred to as a ``member'' herein) may be 
registered with the CBOT as a ``Security Futures Dealer'' with respect 
to one or more security futures contracts traded on the Exchange, to 
provide liquidity and orderliness in the market for such contracts. In 
order to be registered as a Security Futures Dealer, the member must 
complete and file with the Exchange, a CBOT Security Futures Dealer 
Registration Form (attached below). The member will be required to 
identify all CBOT security futures contracts for which it seeks to be 
registered as a Security Futures Dealer and to elect one of the 
categories of market maker obligations set forth in CBOT Regulation 
431.07(c), which are described below. By signing the Registration Form, 
the member will confirm that it meets and will continue to meet the 
requirements to act as a security futures market maker under CBOT Rules 
and Regulations.

Market Maker Exclusion From Security Futures Customer Margin 
Requirements

    A member that is a security futures market maker will be excluded 
from the security futures customer margin requirements set forth in 
CBOT Regulation 431.07, if the member meets all of the following 
qualifications:
    (i) The member must be registered with the Exchange as a dealer in 
security futures as defined in Section 3(a)(5) of the Securities 
Exchange Act of 1934 (``Exchange Act''); and
    (ii) The member must be registered as a floor broker or a floor 
trader under section 4f(a)(1) of the Commodity Exchange Act (``CEA''), 
or be registered as a dealer with the Securities and Exchange 
Commission (``SEC'') under Section 15(b) of the Exchange Act; and
    (iii) The member must maintain records sufficient to prove 
compliance with the requirements set forth in CBOT Regulation 431.07 
and Commodity Futures Trading Commission (``CFTC'') Regulation 
41.42(c)(2)(v) or SEC Regulation 242.400(c)(2)(v), as applicable, 
including without limitation, trading account statements and other 
financial records sufficient to detail activity; and
    (iv) The member must hold itself out as being willing to buy and 
sell security futures for its own account on a regular or continuous 
basis.
    CBOT Regulation 431.07 also provides that any market maker that 
fails to comply with applicable CBOT, CFTC, or SEC Rules or 
Regulations, shall be subject to disciplinary action in accordance with 
Chapter 5 of the CBOT Rulebook. Appropriate sanctions in the case of 
any such failure shall include, without limitation, a revocation of the 
market maker's registration with the Exchange as a Security Futures 
Dealer.

Market Maker Categories

    CBOT Regulation 431.07(c) specifies three alternative ways for a 
member to satisfy the requirement that a market maker hold itself out 
as being willing to buy and sell security futures for its own account 
on a regular or continuous basis. Each member seeking market maker 
designation must register for one of the following three market maker 
categories and will undertake to perform all of the obligations set 
forth in the elected category:

Category 1 (CBOT Regulation 431.07(c)(1))

    The market maker will provide continuous two-sided quotations 
throughout the trading day for all delivery months of security futures 
contracts representing a meaningful proportion of the total trading 
volume of security futures contracts on the Exchange,* subject to 
relaxation during unusual market conditions as determined by the 
Exchange (such as a fast market in either a security futures contract 
or a security underlying a security futures contract) at which times 
the market maker must use its best efforts to quote continuously and 
competitively. The market maker must provide quotations for a minimum 
quantity of one (1) contract with a maximum bid/ask spread of no more 
than the greater of $0.20 or 150% of the bid/ask spread in the primary 
market for the underlying security.

Category 2 (CBOT Regulation 431.07(c)(2))

    The market maker will respond to at least 75% of the requests for 
quotation for all delivery months of security futures contracts 
representing a meaningful proportion of the total trading volume of 
security futures contracts on the Exchange,* subject to relaxation 
during unusual market conditions as determined by the Exchange (such as 
a fast market in either a security futures contract or a security 
underlying a security futures contract) at which times the market maker 
must use its best efforts to quote competitively. When responding to 
requests for quotation, the market maker must quote within five seconds 
for a minimum quantity of one (1) contract with a maximum bid/ask 
spread of no more than the greater of $0.20 or 150% of the bid/ask 
spread in the primary market for the underlying security.
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    \*\ Beginning on the 181st calendar day after the commencement 
of trading of security futures contracts on the Exchange, a 
``meaningful proportion of the total trading volume of security 
futures contracts on the Exchange'' will mean a minimum of 20% of 
such trading volume.
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Category 3 (CBOT Regulation 431.07(c)(3))

    (i) The market maker will be assigned to a group of security 
futures contracts listed on the Exchange that is either unlimited in 
nature (``Unlimited Assignment'') or will be assigned to no more than 
20% of the security futures contracts listed on the Exchange (``Limited 
Assignment''); and
    (ii) At least 75% of the market maker's total trading activity in 
CBOT

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security futures contracts must be in its assigned security futures 
contracts, measured on a quarterly basis; and
    (iii) During at least 50% of the trading day, the market maker must 
have bids or offers in the market that are at or near the best market, 
except in unusual market conditions as determined by the Exchange (such 
as a fast market in either a security futures contract or a security 
underlying a security futures contract), with respect to at least 25% 
(in the case of an Unlimited Assignment) or at least one (1) (in the 
case of a Limited Assignment) of its assigned security futures 
contracts; and
    (iv) The requirements in (ii) and (iii) must be satisfied on at 
least the following percentages of trading days in each calendar 
quarter:
    (a) 90% (in the case of an Unlimited Assignment);
    (b) 80% (in the case of a Limited Assignment); or
    (c) 80% (in the case of either an Unlimited Assignment or a Limited 
Assignment if the Exchange is listing four or fewer security futures 
contracts).

Qualification for ``60/40'' Tax Treatment

    To qualify as a ``dealer'' in security futures contracts within the 
meaning of section 1256(g)(9) of the Internal Revenue Code of 1986, as 
amended (``Code''), a member is required to:
    (i) Register as a Security Futures Dealer for purposes of the 
Exchange's security futures margin rules under Category 1 or Category 2 
above; and
    (ii) Undertake in its registration form to provide quotations for 
all products specified for the market maker exclusion from the CBOT 
security futures margin rules; and
    (iii) Quote a minimum size of:
    (a) Ten (10) contracts for each security futures product not 
covered by (b) or (c) below;
    (b) Five (5) contracts for each security futures product specified 
by the member to the extent such quotations are provided for delivery 
months other than the next two delivery months then trading; and
    (c) One (1) contract for any single stock futures contract where 
the average market price for the underlying security was $100 or higher 
for the preceding calendar month or for any futures contract on a 
narrow-based security index, as defined by section 1a(25) of the CEA.

Products

    As noted above, in completing the CBOT Security Futures Dealer 
Registration Form, a member must specify all CBOT security futures 
contracts for which it intends to act as a market maker. The Exchange 
will assign to the member all of the security futures contracts listed, 
unless the CBOT provides written notice to the member identifying any 
security futures contracts for which such assignment is not being 
granted. A member may change the list of contracts for which it 
undertakes to act as a market maker for any calendar quarter by filing 
a revised CBOT Security Futures Dealer Registration Form with the 
Exchange on any business day prior to the last trading day of the 
quarter, and the change shall be effective retroactive to the first 
trading day of the quarter. Each market maker shall be responsible for 
maintaining books and records that confirm that it has fulfilled its 
quarterly obligations under the market maker category specified on its 
Registration Form with respect to all CBOT security futures contracts 
assigned for that calendar quarter.
* * * * *

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 of such 
statements.

A. Statement of the Purpose of, and Statutory Basis for, the Proposed 
Rule Change

1. Purpose
    Pursuant to CBOT Rule 225.00, the Exchange has adopted a security 
futures market maker program under which an individual member or member 
firm (each referred to as a ``member'' herein) may be registered with 
the CBOT as a Security Futures Dealer \3\ with respect to one or more 
security futures contracts traded on the Exchange to provide liquidity 
and orderliness in the market for such contracts. The proposed rule 
change sets forth the procedures necessary for members to be registered 
as CBOT Security Futures Dealers and the policies that apply to such 
registration.
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    \3\ A Security Futures Dealer is defined in proposed CBOT 
Regulation 431.07, which is the subject of SR-CBOT-2006-01. The 
Commission is today approving SR-CBOT-2006-01. See Securities 
Exchange Act Release No. 53626 (``Customer Margin Requirements 
Approval Order'').
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    The proposed rule change restates the qualifications that members 
must meet under proposed CBOT Regulation 431.07 to qualify for the 
market maker exclusion from CBOT security futures customer margin 
requirements.\4\ In addition, the proposed rule change reminds members 
that failure to comply with applicable CBOT rules or regulations or 
rules or regulations under the Act or the Commodity Exchange Act 
(``CEA'') is subject to disciplinary action under Chapter 5 of the 
Exchange's Rulebook. The appropriate sanctions for any such failure 
include, without limitation, revocation of the market maker's 
registration as a CBOT Security Futures Dealer.
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    \4\ See id.
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    Under the proposed rule change, a member who wishes to be a 
security futures market maker entitled to exclusion from the security 
futures customer margin requirements must file a CBOT Security Futures 
Dealer Registration Form with the Exchange. The registration form 
requires members to identify all CBOT security futures contracts for 
which they are seeking assignment as market makers, as well as the 
qualifying market maker category under proposed CBOT Regulation 
431.07(c). By signing the registration form, the member confirms that 
it meets and will continue to meet the requirements to act as a 
security futures market maker under the Exchange's rules. The 
registration form requires members to list all CBOT security futures 
contracts for which they will act as market makers. The registration 
form also requires a member to identify the qualifying market maker 
category under proposed CBOT Regulation 431.07(c).\5\
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    \5\ Under proposed CBOT Regulation 431.07(c), there are three 
alternative ways for a member to satisfy the requirement that a 
security futures dealer hold itself out as being willing to buy and 
sell security futures for its own account on a regular or continuous 
basis. See Customer Margin Requirements Approval Order, supra note 
3.
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    The proposed rule change establishes that the Exchange will assign 
to the member all security futures contracts listed on its registration 
form, unless the Exchange provides written notice to the member 
identifying any security futures contracts for which such assignment is 
not being granted. Under the proposed rule change, for any calendar 
quarter, a market maker may change the list of security futures 
contracts to which it is assigned by filing a revised CBOT Security 
Futures Dealer Registration Form prior to the last trading day in the 
calendar quarter. Such change in contract designation will be effective

[[Page 19773]]

retroactive to the first trading day of such quarter. The proposed rule 
change also makes clear that each market maker is responsible for 
maintaining books and records that confirm that it has fulfilled its 
quarterly obligations under the market maker category specified on its 
registration form for all assigned security futures contracts for that 
quarter. Specifically, the proposal states that a security futures 
market maker must maintain records sufficient to prove compliance with 
the requirements set forth in proposed CBOT Regulation 431.07 and 
applicable regulations under the Act and the CEA, including without 
limitation, trading account statements and other financial records 
sufficient to detail activity.
    The proposed rule change sets forth the requirements that must be 
met to qualify as a ``dealer'' in security futures contracts within the 
meaning of section 1256(g)(9) of the Internal Revenue Code of 1986, as 
amended (``Code'').\6\ Under the proposed rule change, to qualify as a 
dealer within the meaning of the Code, a member must: (i) Register as a 
CBOT Security Futures Dealer for purposes of the Exchange's security 
futures customer margin rules under Category 1 or Category 2 (proposed 
CBOT Regulation 431.07(c)(1) or (c)(2)); (ii) undertake in its 
registration form to provide quotations for all contracts specified for 
the market maker exclusion from the Exchange's security futures 
customer margin rules; and (iii) quote a minimum size of:
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    \6\ 26 U.S.C. 1256(g)(9).
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    (a) Ten (10) contracts for each security futures product not 
covered by (b) or (c) below;
    (b) Five (5) contracts for each security futures product specified 
by the market maker to the extent such quotations are provided for 
delivery months other than the next two delivery months then trading; 
and
    (c) One (1) contract for any single stock futures contract where 
the average market price for the underlying security was $100 or higher 
for the preceding calendar month or for any futures contract on a 
narrow-based security index, as defined by section 1a(25) of the 
CEA.\7\
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    \7\ 7 U.S.C. 1a(25).
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2. Statutory Basis
    The CBOT believes that the proposal is consistent with section 6(b) 
of the Act,\8\ in general, and section 6(b)(5) of the Act,\9\ in 
particular, which requires, among other things, that exchange rules be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. The Exchange believes that 
the proposed rule change establishes procedures and policies for its 
security futures market maker program, which, according to the 
Exchange, are designed to provide liquidity and orderliness in the 
markets for CBOT security futures contracts. Thus, the CBOT believes 
that the proposed rule change promotes just and equitable principles of 
trade and protects investors and the public interest.
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    \8\ 15 U.S.C. 78f(b).
    \9\ 15 U.S.C. 78f(b)(5).
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B. Statement of Burden on Competition

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

C. Comments on the Proposed Rule Change Received From Members, 
Participants, or Others

    The Exchange has not solicited or received any written comments 
regarding the proposed rule change, nor will any such comments be 
solicited.

III. 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);
     Send an e-mail to [email protected]. Please include 
File Number SR-CBOT-2006-02 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-2006-02. This file 
number should be included on the subject line if e-mail is used. To 
help the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments, all 
written statements with respect to the proposed rule change that are 
filed with the Commission, and all written communications relating to 
the proposed rule change between the Commission and any person, other 
than those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for inspection and 
copying in the Commission's Public Reference Section. Copies of such 
filing also will be available for inspection and copying at the 
principal office of 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-2006-02 and should be submitted on or before May 8, 
2006.

IV. Commission Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\10\ In 
particular, the Commission believes that the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act,\11\ 
which requires, among other things, that the rules of the Exchange be 
designed to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest. In addition, the 
Commission believes that the proposed rule change is consistent with 
section 7(c)(2)(B) of the Act,\12\ which provides, among other things, 
that the margin requirements for securities futures must preserve the 
financial integrity of markets trading security futures and prevent 
systemic risk. The Commission also believes that the proposed rule 
change is consistent with Rule 400(c)(2)(v) under the Act,\13\ which 
permits a national securities exchange to adopt rules containing 
specific requirements for security futures dealers to qualify for an 
exclusion from the margin requirements for securities futures under 
section 7(c)(2)(B) of the Act.\14\ The Commission believes that the 
proposed obligations for market makers satisfy this requirement. 
Specifically, the

[[Page 19774]]

Commission believes that the Exchange's market maker registration 
policy and procedures, and the qualification requirements for ``60/40'' 
tax treatment, should help ensure that market makers provide liquidity 
and orderliness in the CBOT market.
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    \10\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78g(c)(2)(B).
    \13\ 17 CFR 242.400(c)(2)(v).
    \14\ 15 U.S.C. 78g(c)(2)(B).
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    The CBOT has requested that the Commission approve the proposed 
rule change prior to the thirtieth day after publication of notice of 
the filing in the Federal Register. The Commission believes that the 
market maker registration policy and procedures and the qualification 
requirement for ``60/40'' tax treatment are an extension of the 
obligations adopted in connection with the CBOT's customer margin 
rules, which set forth the standards under which a CBOT member may be 
excluded from the Exchange's margin requirements as a ``market maker,'' 
and therefore should raise no novel regulatory issues related to margin 
requirements.\15\ Furthermore, the Commission notes that the proposed 
rule change is substantially similar to OneChicago, LLC's market maker 
registration policy and procedures, which were approved by the 
Commission. Accordingly, the Commission finds good cause, consistent 
with section 19(b)(2) of the Act,\16\ to approve the proposed rule 
change prior to the thirtieth day after publication of the notice of 
filing thereof in the Federal Register.
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    \15\ See Securities Exchange Act Release No. 50115 (July 29, 
2004) 69 FR 48261 (August 9, 2004).
    \16\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\17\ that the proposed rule change (SR-CBOT-2006-02) is hereby approved 
on an accelerated basis.
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    \17\ Id.
    \18\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
Nancy M. Morris,
Secretary.
 [FR Doc. E6-5611 Filed 4-14-06; 8:45 am]
BILLING CODE 8010-01-P