[Federal Register: February 1, 2000 (Volume 65, Number 21)]
[Page 4807-4808]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



RIN 3038-ZA08

Average Price Calculations by Futures Commission Merchants

AGENCY:  Commodity Futures Trading Commission.

ACTION:  Advisory.


SUMMARY:  The Commodity Futures Trading Commission (``Commission'') is
issuing guidance concerning the circumstances in which a futures
commission merchant (``FCM'') may calculate for and confirm to its
customers an average price when multiple prices are received on an
order or series of orders. The Commission has determined that if
prerequisite conditions specified in this advisory are met, an FCM may
calculate an average price for its affected customers whether the
contracts involved are traded on domestic or non-domestic exchanges.

EFFECTIVE DATE:  February 1, 2000.

FOR FURTHER INFORMATION CONTACT:  David Taylor, (202) 418-5488.


I. Introduction and Background

    On September 15, 1999, the Commodity Futures Trading Commission
(``CFTC'' or ``Commission'') Division of Trading and Markets
(``Division'') received a written request from the Futures Industry
Association (``FHA'') Law and Compliance Division for guidance from the
Commission regarding whether a futures commission merchant (``FCM'')
may calculate an average price for its customers in situations when
multiple prices are received on an order or series of orders involving
contracts traded on domestic as well as non-domestic exchanges.
    The CFTC has permitted the use of average prices in the futures
industry since 1992. On April 10, 1992, the

[[Page 4808]]

Division permitted the Chicago Mercantile Exchange (``CME'') to make
effective without Commission approval CME Rule 553, which enabled an
FCM to confirm to its customers an average price calculated by the
Exchange when multiple prices were received on an order or series of
orders for the FCM's customers. On June 10, 1992, the Division
permitted the Chicago Board of Trade (``CBI'') to make effective
without Commission approval a similar average price order provision
(CBT Rule 421.03). Under these rules, a domestic exchange has been
responsible for calculating the average prices for contracts executed
on that exchange, and the FCM involved has confirmed these prices to
the appropriate customers.
    On May 26, 1995, the Division issued a non-action letter (``No-
Action Letter'') that permits an FCM to calculate and confirm average
prices to its customers for trades executed on non-domestic exchanges
(CFTC No-Action Letter No. 95-59, CCH Comm. Fut. L. Rep. para. 26,434,
1995 WL 389299 (C.F.T.C)). Where non-domestic exchanges are involved,
the No-Action Letter permits the FCM itself, subject to certain
conditions, to calculate the average price and then confirm it to its
    Certain FCMs have recently expressed an interest in having the
flexibility to calculate average prices for contracts executed on both
domestic and non-domestic exchanges. Although some FCMs will still
prefer to use the exchange calculations, other FCMs have developed the
necessary systems to support the average price calculations for
contracts executed on non-domestic exchanges. These FCMs would prefer
to apply their systems for all contracts for which average price
calculations would be appropriate.\1\ These firms have indicated that
this flexibility would increase efficiencies by allowing them to apply
a consistent operational function for average pricing on both domestic
and non-domestic exchanges.

    \1\ As specified in current exchange rules regarding average
pricing, an order or series of orders executed during a Regular
Trading Hours Session or matched during an electronic trading
session at more than one price may be averaged if each order is for
the same account or group of accounts and for the same commodity and
month for futures, or for the same commodity, month, put/call and
strike price for options. APS treatment may apply to multiple
accounts that are part of a managed account program or other common
investment program, or to individual discretionary accounts. It may
also be applied to individual non-discretionary accounts, but prices
for one of these accounts may not be averaged with those of other
non-discretionary accounts.

II. Prerequisite Conditions for FCM Calculation of Average Prices

    The Commission believes that it would be acceptable to allow
flexibility for FCMs to calculate and confirm average prices involving
contracts traded on domestic as well as non-domestic exchanges,
provided that certain prerequisite conditions were met. The applicable
conditions would be as follows:
    1. The customer has requested average price reporting.\2\

    \2\ Under Commission Regulation 1.35(a-1) and Appendix C [para.
2211C], it will continue to be impermissible to bunch an order of a
customer who has not requested average pricing with other orders in
a bunched order for which the specified allocation designator or
allocation method is average pricing.

    2. Average price reporting in accordance with this Advisory is
permitted under the rules of the domestic exchange involved or not
prohibited under the rules of the foreign exchange involved.
    3. Each individual trade is submitted and cleared by the relevant
clearing organization at the executed price.
    4. The FCM calculates and confirms to its customers the weighted
mathematical average price.\3\

    \3\ As currently required for average price calculations made by
exchanges, the weighted mathematical average price is to be computed
by: (a) multiplying the number of contracts purchased or sold at
each execution price by that price, (b) adding the results together,
and (c) dividing by the total number of contracts. For a series of
orders, the average price may be computed based on the average price
of each order in that series. As in current practice, FCMs are
permitted to confirm to customers either the actual average price or
the average price rounded to the next price increment. In the latter
case, the FCM must round the average price up to the next price
increment for a buy order or down to the next price increment for a
sell order, and pay any residual thus created to the customer, thus
placing that customer in the same position as if the actual average
price had been confirmed to him or her. APS calculations can produce
prices that do not conform to whole cent increments, and in such
cases amounts less than one cent may be retained by the FCM.
Although disclosure to customers concerning how average prices are
calculated was required when use of average prices was first
permitted in 1992 as noted above, FIA has represented to the
Commission that such disclosures are no longer needed because
average pricing has become familiar to futures industry customers.
Accordingly, the Commission will no longer require an FCM to provide
such disclosures to its customers, but notes that an FCM should
provide such information upon a customer's request.

    5. The FCM possess the records to support the calculations and the
allocations to customer accounts, maintains them in accounts, maintains
them in accordance with Commission Regulation 1.31, and makes them
available for inspection by affected customers on request.
    6. The FCM identifies each trade to which an average price is
assigned as having an average price on each confirmation statement and
monthly statement on which the trade is reported to the customer
pursuant to Commission Regulation 1.33.\4\

    \4\ Where an FCM makes it own average price calculations as set
forth above, the FCM will no longer be required to indicate average
price treatment on order tickets or electronic trading system
entries, since in that event the clearing house will no longer be
involved, and since the simple arithmetic calculation of an average
price does not implicate any on-floor or electronic trading system
trade practice.

    7. The FCM's proprietary trades are not averaged with customer
trades subject to average price calculations.\5\

    \5\ In situations where the FCM participates on its own behalf
in a collective vehicle such as a hedge fund, and trades of the
collective vehicle are included in average pricing involving
customers of the FCM, the Commission will not regard the FCM as
having violated the prohibition on averaging proprietary trades with
customer trades so long as the FCM owns less than 10% of the
collective vehicle (see Commission Regulation 1.3(y)).

    The Commission believes that these conditions provide reasonable
safeguards that support permitting an FCM to perform average price
calculations. The Commission further believes that these conditions
should be applied consistently for the calculation of trades executed
on both domestic and non-domestic exchanges.

III. Conclusion

    Average prices have been in use for several years and in certain
instances can be more informative and understandable to customers than
providing different and multiple prices. Permitting FCMs to calculate
and confirm average prices to customers effectively permits alternative
operational procedures to achieve the same results. It also furthers
the Commission's stated goal of reducing the regulatory burden on the
domestic futures industry, in order to permit it to compete freely in
the global futures marketplace, whenever this can be done without
undermining the purposes of and the safeguards provided by the
Commodity Exchange Act and the Commission's regulations.
    Accordingly, the Commission has determined that where all of the
prerequisite conditions specified above are met, FCMs may, if they
choose, calculate average prices for and confirm average prices to
their affected customers, whether the contracts involved are executed
on domestic or non-domestic exchanges.

    Issued in Washington, D.C., on January 20, 2000 by the
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 00-1907 Filed 1-31-00; 8:45 am]

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