[Federal Register: October 13, 2000 (Volume 65, Number 199)]
[Page 60912-60913]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Application of onExchangeSM Board of Trade, Inc. for
Designation as a Contract Market in Five Year U.S. Treasury Note
Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of the terms and conditions of proposed
commodity futures contracts.


SUMMARY: OnExchangeSM Board of Trade, Inc. (``ONXBOT'' or
``Exchange'') has applied for designation as a contract market for the
automated trading of Five Year U.S. Treasury Note futures contracts on
its electronic trading system, onTradeSM. The Exchange has
not previously been approved by the Commodity Futures Trading
Commission (``Commission'') as a contract market in any commodity.
Accordingly, in addition to the terms and conditions of the proposed
futures contract, ONXBOT has submitted to the Commission proposed
bylaws and rules pertaining to ONXBOT membership, governance, trading
standards, disciplinary and arbitration procedures, and various other
materials necessary to meet the requirements for a board of trade
seeking initial designation as a contract market, including a
description of its trade-matching algorithm. ONXBOT's submission also
includes various proposed bylaws and rules of the
onExchangeSM Clearing Corporation (``ONXCC''), an affiliate
that would be responsible for clearing and settlement functions for the
    Acting pursuant to the authority delegated by Commission Regulation
140.96, the Division of Economic Analysis and the Division of Trading
and Markets (``the Divisions'') have determined to publish the
Exchange's proposal for public comment. The Divisions believe that
publication of the proposal for comment at this time is in the public
interest, will assist the Commission in considering the views of
interested persons, and is consistent with the Commodity Exchange Act.
The Divisions seek comment pertaining to all aspects of ONXBOT's
application and which address any issue commenters believe the
Commission should consider.

DATES: Comments must be received on or before November 13, 2000.

FOR FURTHER INFORMATION CONTACT: With respect to questions about the
terms and conditions of ONXBOT's proposed futures contract, please
contact Thomas M. Leahy, Jr., Chief of Financial Instruments, Division
of Economic Analysis, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW, Washington, DC 20581; telephone
number (202) 418-5278; facsimile number (202) 418-5527; or electronic
mail: tleahy@cftc.gov. With respect to ONXBOT's and ONXCC's other
proposed rules, please contact Lois J. Gregory, Special Counsel,
Division of Trading and Markets, at the same address, by telephone at
(202) 418-5483, by facsimile at (202) 418-5536, or by electronic mail
at lgregory@cftc.gov; or Joshua R. Marlow, Attorney-Advisor, Division
of Trading and Markets, at the same address, by telephone at (202) 418-
5484, by facsimile at (202) 418-5536, or by electronic mail at


I. Description of Proposal

    By letters dated September 12, 2000 and September 27, 2000, ONXBOT,
a subsidiary of onExchangeSM, Inc., has applied to the
Commission for designation as a contract market for electronic trading
of futures contracts in Five Year U.S. Treasury Notes. The Exchange has
not previously been approved as a contract market in any commodity.
Thus, in addition to the terms and conditions of the proposed futures
contract, ONXBOT has submitted, among other things, proposed bylaws and
rules pertaining to ONXBOT membership rights and obligations,
governance, trading standards, and disciplinary and arbitration
procedures, along with a description of its trading system's trade-
matching algorithm. ONXBOT's submission also includes various proposed
ONXCC bylaws, rules, and procedures.
    ONXBOT is organized as a Delaware corporation with one class of
shares. All shares in ONXBOT are currently held by
onExchangeSM, Inc. OnExchangeSM, Inc. is majority
owned by its officers, employees, and venture capital investment firms.
Once operational, the Exchange would be governed by a Board of
Directors (``ONXBOT Board''), which would include seven directors
elected by the shareholders and two public directors appointed by the
seven non-public directors. The ONXBOT Board would appoint a Chairman
of the Board, President, Secretary, and Treasurer, and the President
would be the chief executive officer of the Exchange. ONXCC would
similarly be governed by a Board of Directors that, among other things,
would appoint a President as chief executive officer of the company.\1\

    \1\ ONXCC is organized as a Delaware non-stock, membership
corporation with two classes of members. Class A members of ONXCC
are entitled to elect and remove directors, and decide all matters
which require a vote of the corporation's members. Only the holders
of Class A shares would be entitled to receive any dividends or
distributions that may be declared or paid by the corporation.
OnExchangeSM, Inc. initially will be the sole Class A
member. Class B members, comprised of all ONXBOT Subscribers, are
not entitled to vote on any matter. ONXCC's Board would initially be
comprised of three directors.

    Trading privileges on ONXBOT would be limited to ONXBOT
Subscribers, who would be required to qualify as Eligible Swap
Participants under Commission Regulation 35.1(b)(2). Each Subscriber
would be limited to trading for its own accounts, with no
intermediation permitted. Subscribers could designate an unlimited
number of Authorized Traders (``ATs'') to exercise discretion over
their trading accounts, and would be responsible for supervising all
activities of their ATs relating to transactions effected on the
Exchange or subject to its rules. Each Subscriber would also be
responsible for training and testing its ATs with respect to the proper
use of the Exchange and its rules. Any violation of the rules and
bylaws of the Exchange by any AT would be deemed a violation of the
AT's Subscriber.

[[Page 60913]]

    ONXBOT contracts would trade over onTradeSM, an
electronic trading system developed by onExchangeSM and
accessed by Subscribers via the Internet.\2\ Under the proposal, orders
could be entered into onTradeSM only by ONXBOT Subscribers
and their ATs. OnTradeSM would accept orders for purchase or
sale of futures contracts, combination trades, and calendar spreads.
Orders would be required to include user identity (including Subscriber
identity), intention to buy or sell, quantity, designation as a
``market order'' or specification of a price limit, time period the
order would remain open, and an activation price if designated as a
stop order. Orders would be executed pursuant to a trade-matching
algorithm that would give first priority to orders at the best prices,
and then give priority among orders at the same price based upon time
of entry into onTradeSM.\3\

    \2\ The proposed trading hours for Five Year U.S. Treasury Note
futures would be from 8:20 a.m. to 3:00 p.m. EST.
    \3\ Subject to this priority, orders for combination trades
would be executed, and the legs thereof would be priced, pursuant to
an algorithm that gives priority to execution of each leg of the
transaction as a separate transaction rather than to execution of
the transaction at a differential, if the prices for the legs of the
transaction are better than, or equal to, the differential price.

    ONXBOT also plans to permit Subscribers to execute block trades
away from the trade matching system.\4\ Both parties to the transaction
must request a Block Order Trade ID from the Exchange in advance and
then submit identical orders to ONXBOT within 10 minutes of obtaining
such ID. The price designated for the block trade must be ``fair and
reasonable'' in light of, among other factors, market liquidity, size
of the transaction, and current market prices (including the underlying
cash market and other related futures markets). ONXBOT would publicize
details of the transaction immediately after receipt of such

    \4\ ONXBOT also would permit Subscribers to execute exchanges of
futures for physicals and exchanges of futures for swaps.

    All orders would be verified with ONXCC for sufficient margin
assets prior to execution.\5\ Upon execution, transaction data would be
instantaneously transmitted to onClearSM, ONXCC's automated
clearing system. The transaction would clear immediately, and
electronic confirmation notices would then be sent to both parties.
ONXCC would have a settlement account at each ONXCC approved custody
bank,\6\ and would maintain at least one subcustody account for each
ONXBOT Subscriber at an approved custody bank,\7\ subject to the terms
of an agreement between ONXCC and the custody bank.\8\ Subscribers
would deposit margin assets in these accounts for purposes of original
margin, delivery margin, and variation margin.\9\

    \5\ OnExchangeSM, Inc. representatives have informed
Commission staff that this margin asset verification process would
take place within a fraction of a second before trade execution.
    \6\ ONXCC rules do not preclude custody agreements with more
than one custody bank. Initially, ONXCC plans to have only one
custody bank, but might enter into other custody bank relationships
in the future, in which case it would establish a master settlement
account for the purpose of netting pays and collects across
settlement accounts.
    \7\ Subscribers are permitted to have more than one trading
account and more than one subcustody account.
    \8\ Assets in subcustody accounts would be held by ONXCC,
subject to Commission regulations requiring segregation of funds at
clearing organizations.
    \9\ Original margin will consist of an amount no less than any
assets necessary to cover three consecutive days of ``maximum price
movement,'' as defined by each ONXBOT contract's terms and

    In the event of Subscriber default, ONXCC would take control of the
Subscriber's open positions and would be empowered by ONXCC rules to
take steps to ensure minimum market disruption, including the closing
out of open positions and liquidation of margin assets. If such
proceeds would be insufficient to cover the default, ONXCC could meet
the shortfall from a number of sources, including its guaranty fund
which will initially consist of $10,000,000.\10\

    \10\ The guaranty fund would increase, as necessary, to provide
an amount equal to 1% of the aggregate original margin required to
be maintained by Subscribers at ONXCC. At no time, however, would it
drop below $10,000,000, regardless of the level of aggregate
original margin, except when money from the fund has been applied to
cover a Subscriber default. ONXCC would not have the power to impose
assessments on non-defaulting Subscribers to cover shortfalls caused
by the default of other Subscribers.

    ONXBOT's provisions for compliance and surveillance programs would
include market surveillance, trade practice surveillance, disciplinary
functions, financial surveillance in cases where
onExchangeSM is the Subscriber's designated self-regulatory
organization, and arbitration. ONXBOT would secure an agreement with
the National Futures Association to perform many of these functions.
Investigations of any suspected violation of ONXBOT and ONXCC bylaws
and rules by Subscribers or ATs would be presented to ONXBOT's Business
Conduct Committee (``BCC''). If the BCC concludes that a violation may
have occurred, it may authorize a settlement agreement, issue a warning
letter, or direct the enforcement staff to institute disciplinary
proceedings. Disciplinary proceedings would be conducted in front of a
hearing panel drawn from the Exchange's Hearing Committee, whose
decision may be appealed to the Board. ONXBOT rules also would permit
summary proceedings against Subscribers and ATs for certain violations.
ONXBOT rules do not contemplate fines as penalties. Penalties resulting
from disciplinary action would only include suspension or termination.

II. Request for Comments

    Any person interested in submitting written data, views, or
arguments on the proposal to designate ONXBOT as a contract market
should submit their comments by the specified date to Jean A. Webb,
Secretary, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street, NW, Washington, DC 20581. In addition,
comments may be sent via facsimile to (202) 418-5521, or by electronic
mail to secretary@cftc.gov. The Divisions seek comment on all aspects
of ONXBOT's application for designation as a new contract market.
Reference should be made to onExchangeSM Board of Trade's
application for designation as a contract market in Five Year U.S.
Treasury Note futures contracts. Copies of the proposed contract's
terms and conditions, as well as the proposed trading rules, clearing
rules, and other governing rules of ONXBOT and ONXCC, are available for
inspection at the Office of the Secretariat, or may be obtained at the
above address or by telephoning (202) 418-5100.
    Other materials submitted by ONXBOT may be available upon request
pursuant to the Freedom of Information Act (5 U.S.C. 552), except to
the extent that they are entitled to confidential treatment pursuant to
17 CFR 145.5 or 145.9. Requests for copies of such materials should be
made to the Freedom of Information, Privacy and Sunshine Act compliance
staff of the Office of the Secretariat at Commission headquarters in
accordance with 17 CFR 145.7, 145.8.

    Issued in Washington, DC, on October 10, 2000.
Alan L. Seifert,
Deputy Director.
[FR Doc. 00-26388 Filed 10-12-00; 8:45 am]

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