[Federal Register: November 13, 1997 (Volume 62, Number 219)]
[Page 60870-60871]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Chicago Mercantile Exchange Petition for Exemption From the Dual
Trading Prohibition Set Forth in Section 4j(a) of the Commodity
Exchange Act and Commission Regulation 155.5

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.


SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
granting the petition of the Chicago Mercantile Exchange (``CME'' or
``Exchange'') for exemption from the prohibition against dual trading
in its S&P 500 futures contract.

DATES: This Order is to be effective November 7, 1997.

FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Special Counsel, or
Rachel Fanaroff Berdansky, Special Counsel, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st St., N.W., Washington, DC 20581; telephone (202) 418-5490.

SUPPLEMENTARY INFORMATION: On October 20, 1993, CME submitted a
Petition for Exemption from the Dual Trading Prohibition contained in
Section 4j of the Commodity Exchange Act (``Act'') and Regulation 155.5
for its affected contract markets, including the S&P 500 futures
contract market.<SUP>1</SUP> The Exchange corrected that petition on
December 1, 1993. Subsequently, the Exchange amended its petition on
January 21, 1994. CME updated its petition on January 21, 1997. Notice
of the public availability of the CME's updated exemption petition was
published in the Federal Register on February 20, 1997.<SUP>2</SUP>

    \1\ Affected contract market means a contract market with an
average daily volume equal to or in excess of 8,000 contracts for
each of four quarters during the most recent volume year. Commission
Regulation 155.5(a)(9). See Section 4j(a)(4). The Commission is
granting CME conditional exemptions from the dual trading
prohibition for its remaining seven affected contract markets. A
Notice of Intent to Condition and proposed Order granting such
conditional exemptions is being submitted for publication together
with this Order.
    \2\ 62 FR 7755 (February 20, 1997). The Commission did not
address the Exchange's dual trading exemption petition in 1994 in
large part because of the Exchange's prior representation that it
intended to automate the entry of trade execution times by
developing a handheld electronic trading terminal. In June 1994, the
Commission was informed that the proposed handheld terminal would
not be in place by the October 1995 deadline for compliance with the
heightened audit trail standards set forth in Section 5a(b)(3) of
the Act. Because CME had not sufficiently demonstrated that its
existing audit trail system met current and future standards, the
Commission required the Exchange to demonstrate its ability to meet
the audit trail requirements using Commission-designed tests and,
thus, deferred consideration of the Exchange's petition. Subsequent
to evaluating the results of the tests, the Commission offered CME
the opportunity to supplement its petition.

    Upon consideration of CME's petition, as supplemented, and other
data and analysis, including, but not limited to:
    Exchange audit trail test results reconciling imputed times to
underlying trade documentation and verifying data on ``window sizes'';
actions taken in response to the Commission's November 1994 Report to
Congress on Futures Exchange Audit Trails, June 1995 Report on Audit
Trail Accuracy and Sequencing Tests (``Audit Trail Report''), and
August 12, 1996 Report on Audit Trail Status and Re-Test (``Audit Trail
Re-Test Report''); Commission trade practice investigations and
compliance reviews conducted in conjunction with rule enforcement
reviews or other investigatory or surveillance activities.
    The Exchange's S&P 500 futures contract trading

    \3\ Under CME Rule 541 (S&P 500 Top Step rule), a member cannot
trade an S&P futures contract for his or her own account while on
the top step of the S&P 500 futures pit, except to liquidate a
position that resulted from an error. Further, a member who has
executed a customer order for an S&P 500 futures contract while on
the top step of the S&P 500 futures pit may not on the same day
trade such contracts for his or her own account.


[[Page 60871]]

    The Division of Trading and Markets Memorandum dated October 28,
1997; and upon review of each element of CME'S trade monitoring system
and of CME's trade monitoring system as a whole, the Commission hereby
finds that CME meets the standards for granting a dual trading
exemption contained in Section 4j(a) of the Act as interpreted in
Regulation 155.5 for its S&P 500 futures contract market.
    Subject to CME's continuing ability to demonstrate that it meets
applicable requirements, the Commission specifically finds with respect
to the S&P 500 futures contract market that CME maintains a trade
monitoring system which is capable of detecting and deterring, and is
used on a regular basis to detect and to deter, all types of violations
attributable to dual trading and, to the full extent feasible, other
violations involving the making of trades and execution of customer
orders, as required by Section 5a(b) of the Act and Regulation 155.5.2
<SUP>4</SUP> The Commission further finds that CME's trade monitoring
system includes audit trail and recordkeeping systems that satisfy the
Act and regulations.

    \4\ The Commission considers CME Rule 541 to be an integral part
of the Exchange's trade monitoring system. In the event of any
material change in such system, the Commission may revisit its
determination to grant this exemption for the S&P 500 futures

    With regard to the S&P 500 futures contract market, each required
component of CME's trade monitoring system, with the exception of one-
minute execution time accuracy, is described in the Commission's Notice
of Intent to Condition and proposed Order being submitted for
publication together with this Order. With respect to one-minute
execution time accuracy, the Commission finds as follows:
One-Minute Execution Time Accuracy
    CME's Regulatory Trade Timing system (``RTT'') imputes an execution
time for every trade.<SUP>5</SUP> Trade times are imputed based upon
entry and exit timestamps on order tickets; time and sales reports;
times that the trades were submitted for clearing; trading card numbers
and sequence of trades on trading cards; 15-minute bracket codes;
manual execution times for certain types of trades; calculated
differentials for spread trades; identification of spread legs and
types of spread trades; and available times resulting from electronic
order entry or trading systems, if any.

    \5\ An imputed timing system does not capture the actual trade
execution time but derives a time from other timing and trade data.

    The Commission has made clear that a ``reliably accurate'' imputed
trade execution time can be demonstrated only by a timing window that
narrows the time assigned to the trade to a two-minute period within
which the trade is most likely to have occurred. For the S&P 500
futures contract, CME's audit trail system records reliably accurate
trade times in increments of no more than one minute in length as
required by Section 5a(b)(2) of the Act, Regulation 1.35(g), and
Appendix A to Regulation 155.5.<SUP>6</SUP> Specifically, the Exchange
has established for the S&P 500 futures contract market that 90 percent
or more of imputed trade times, as assigned by RTT, are reliable,
precise, and verifiable as demonstrated by being imputed within a
timing window of two minutes or less (``90 percent performance

    \6\ Commission Regulation 1.35(g) requires that ``[a]ctual times
of execution shall be stated in increments of no more than one
minute in length.'' Section 5a(b)(2) of the Act, among other things,
codified that timing requirement by stating that an exchange's audit
trail system shall, ``consistent with Commission regulation,
accurately record the times of trades in increments of no more than
one minute in length.'' Section II of Appendix A to Commission
Regulation 155.5 requires that a contract market, in describing its
audit trail system in a petition for exemption from the dual trading
prohibition, ``[d]emonstrate the highest degree of accuracy
practicable (but in no event less than 90% accuracy) of trade
execution times required under regulation 1.35(g) (within one
minute, plus or minus, of execution) * * *. ..'' In addition, the
contract market must ``[d]emonstrate the effective integration of
such trade timing data into the contract market's surveillance
system with respect to dual trading-related abuses.'' For contract
markets that impute trade execution times, Appendix A requires that
the contract market provide a description of the trade imputation
algorithm, ``including how and why it reliably establishes the
accuracy of the imputed trade execution times.''

    In order to demonstrate attainment of the 90 percent performance
standard, the Exchange has provided windows data for the S&P 500
futures contract market in response to Commission requests. For both
December 10, 1996, and March 12, 1997, the percentage of trades with
timing windows of two minutes or less was 90 percent. On June 30, 1997,
the Exchange provided windows data for three specific trade dates
selected by the Commission using a random sampling method. The windows
data revealed that the percentage of trades with timing windows of two
minutes or less was 91 percent on May 28, 1997, and June 5, 1997, and
92 percent on June 10, 1997. Thus, the Exchange has demonstrated
consistent compliance with the 90 percent performance standard for the
S&P 500 futures contract.
    Accordingly, on this date, the Commission HEREBY GRANTS CME's
Petition for Exemption from the dual trading prohibition for trading in
its S&P 500 futures contract.
    For this exemption to remain in effect, CME must demonstrate on a
continuing basis that it meets the relevant statutory and regulatory
requirements. The Commission will monitor continued compliance through
its rule enforcement review program and any other information it may
obtain about CME's program.
    Unless otherwise specified, the provisions of this Order shall be
effective on the date on which it is issued and shall remain in effect
unless and until it is revoked in accordance with Section 8e(b)(3)(B)
of the Commodity Exchange Act, 7 U.S.C. Sec. 12e(b)(3)(B).
    It is so ordered.

    Dated: November 7, 1997.
Edward W. Colbert,
Deputy Secretary to the Commission.
[FR Doc. 97-29894 Filed 11-12-97; 8:45 am]

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