[Federal Register: May 21, 1999 (Volume 64, Number 98)]
[Page 27759-27760]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]



Chicago Mercantile Exchange: Proposal To List Additional Contract
Months in the CME Russian Ruble Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposal to list new months in a
commodity futures contract.


SUMMARY: The Chicago Mercantile Exchange (CME or Exchange) has
submitted a proposal to list additional contract months in the CME
Russian Ruble Futures Contract. Under the proposal, the CME would, as
is the case with the currently listed June 1999 contract month, base
the cash settlement price on two surveys performed by the CME clearing
house at random times on the last day of trading.
    The Acting Director of the Division of Economic Analysis
(Division), acting pursuant to the authority delegated by Commission
Regulation 140.96, has determined that publication of the proposal for
comment is in the public interest, will assist the Commission in
considering the views of interested persons, and is consistent with the
purpose of the Commodity Exchange Act.

DATES: Comments must be received on or before June 7, 1999.

ADDRESSES: Interested persons should submit their views and comments 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 by facsimile transmission to facsimile
number (202) 418-5521, or by electronic mail to secretary@cftc.gov.
Reference should be made to the proposal to list additional contract
months in the CME Russian Ruble futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Michael Penick of the
Division of Economic Analysis, Commodity Futures Trading Commission,
Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581,
telephone (202) 418-5279. Facsimile number: (202) 418-5527. Electronic
mail: mpenick@cftc.gov.

SUPPLEMENTARY INFORMATION: On October 6, 1998, the Commission approved
the suspension of listing of new contract months in the Russian ruble
futures contract. In a letter to the CME dated December 9, 1998, the
Commission approved proposed amendments to the cash settlement
procedure of the Russian ruble futures contract and notified the CME
that it was approving those proposed amendments for application to
existing contract months only. The Commission also notified the CME in
that letter that the CME must submit any proposal to list additional
contract months pursuant to Commission Regulation 1.41(b) rather than
the expedited procedure of Regulation 1.41(l).\1\

    \1\ Commission Regulation 1.41(l) provides that an exchange
proposal to list additional contract months in a futures or option
contract will be deemed approved 10 days after receipt by the
Commission if it does not provide for the listing of a contract
month outside the currently established cycle of contract months.

    Under the CME's current cash settlement procedure, as approved by
the Commission on December 9, 1998 for months listed through June 1999,
the CME performs two surveys of financial institutions at randomly
selected times during MICEX's afternoon System for Electronic Trading
(SELT) session for transactions between commercial banks (currently
conducted between 12 noon and 4:30 p.m. Moscow time) on each Moscow
business day.\2\ The final settlement price is the reciprocal of the
average of the two rubles-per-dollar exchange rates calculated from the
two surveys on the last trading day.

    \2\ MICEX currently runs two daily trading sessions--a morning
session for importers and exporters and an afternoon session for
transactions between commercial banks.

    During each survey, the CME asks participants for two separate
rubles per dollar exchange rates as well as an overnight interbank
ruble interest rate. Those two rubles per dollar exchange rates are a
``today rate'' (the exchange rate for same-day settlement) and a
``tomorrow rate'' (the exchange rate for settlement on the next Moscow
business day).\3\ In its calculation of the final settlement price, the
CME uses the today rate from each participant that provides a today
rate. If any participant provides a tomorrow rate and overnight
interest rate, but not a today rate, the CME calculates an ``implied
today rate'' for such participants. The implied today rate is
calculated using the interest rate parity relation based on the
tomorrow rate, the overnight ruble interest rate, and the federal funds
overnight U.S. dollar interest rate.\4\ Thus, the result of any single
survey (and, thus, the cash settlement price) could consist of a
mixture of actual and implied today rates. In practice, given that
trading for same day settlement is not permitted in the MICEX afternoon
session, past cash settlement prices based on this procedure have
consisted entirely of implied today rates.

    \3\ At the afternoon MICEX session, trading is currently allowed
only for settlement on the next Moscow business day.
    \4\ In this case, the tomorrow rate and overnight ruble interest
rate used are average rates calculated from the daily survey
results. The overnight federal funds rate is obtained from Telerate.

    In the event that the CME is unable to complete both daily surveys
on the last trading day, the CME calculates the final settlement price
based on two surveys, performed under the same procedures, conducted on
the Moscow business day following the last trading day. If the CME is
also unable to complete two surveys on the second day, then the final
settlement price is based on the survey results from the most recent
business day prior to the last trading day on which two surveys were
successfully completed.
    The CME proposes to implement the proposal to list additional
contract months shortly after receipt of Commission approval. The CME
characterized the Russian ruble contract as ``an important hedging
mechanism'' and stated that, without additional contract months, the
``international marketplace will lose the premier tool for managing
Russian ruble vs. U.S. dollar price risk.'' The CME also affirmed that
any basis risk that may be associated with positions in the ruble
contract is less than the risk exposure that would be faced by hedgers
in the absence of the ruble contract, since there is no other viable
means to hedge ruble positions.
    Moreover, with respect to susceptibility to manipulation, the CME
stated in its submission that since the events that occurred last
summer, ``the Russian economy has stabilized and is taking steps to
recovery.'' The CME noted that real consumer spending and industrial
production have increased, while monthly inflation rates have
decreased. In addition, the CME cited the Russian Finance Ministry
claim that

[[Page 27760]]

wage and pension arrears have been reduced and the government has paid
all federal wage arrears. Moreover, according to the CME, Russia has
reached agreements with the IMF and World Bank that would provide
Russia with access to additional loans and the ability to negotiate
with creditors to restructure existing debts. Further, Russia has
restructured most of its domestic debt which had been frozen in August
    The CME further noted that its CME/EMTA reference rate survey is
widely accepted in the cash market. It was noted that the results of
the survey, which is conducted daily, has been accepted as a rate
source for non-deliverable forward Russian ruble-US Dollar
transactions. That rate also has been approved by the Emerging Markets
Traders Association, the Foreign Exchange Committee, and the
International Swaps Dealers Association for settlement of U.S. dollar/
Russian ruble transactions in the spot market. Thus, according to the
CME, the CME/EMTA reference rate has become the de facto price
discovery mechanism for the Russian ruble market. Moreover, the CME
noted that the CME/EMTA reference rate survey was used successfully to
cash settle the October, November, and December 1998 futures contracts
and the March 1999 futures contract. Moreover, on each of those cash
settlement days, at least eight survey participants provided quotes,
consistent with the CME's existing contract terms and conditions
regarding final cash settlement survey.
    The Division requests comment on the proposal to list additional
contract months. The Division specifically requests comment on whether
the survey procedure has resulted, and will continue to result, in a
cash settlement price that is reflective of the underlying cash market
and otherwise meets the standards of the Commission's Guideline No.
1.\5\ In that regard, the Division notes that the CME survey procedure
is designed to obtain an exchange rate for same-day settlement during
the afternoon MICEX session but that trading for same-day settlement is
not currently permitted during that MICEX session. In its December 9,
1998 letter to the CME, the Commission approved the use of a today rate
to settle existing contract months, in part because there were
indications that futures prices in those contract months were based on
traders' expectations that the cash settlement price ultimately would
be based on a today rate. The Division now requests comment on the
appropriateness of using an implied today rate for newly listed months.
The Division also requests comment on whether the CME procedure will
continue to result in a cash settlement price that is not readily
susceptible to manipulation or distortion in light of the degree of
liquidity of the Russian ruble market and the restrictions on currency
trading in Russia. Specifically, will the procedures used by the CME,
including setting the cash settlement price based on two surveys
conducted at random times, tend to prevent market participants from
influencing the cash settlement price? Finally, in the current
environment and given the proposed cash settlement provisions, can the
Russian ruble contract be used for hedging or price discovery?

    \5\ The Commission's Guideline No. 1 (17 CFR part 5, Appendix A,
section (a)(2)(iii)) requires, for cash settled contracts, that the
cash price series must be reflective of the underlying cash market
and be reliable, acceptable, publicly available, and timely and not
readily susceptible to manipulation.

    The proposal was submitted to the Commission under the Commission's
45-day Fast Track procedures of Commission Regulation 1.41(b)(2). In
view of the limited review period under the Fast Track procedures, the
Division has determined to publish for public comment notice of the
proposal for 15 days, rather than 30 days as provided for proposals
submitted under the regular review procedures.
    Copies of the proposal will be available for inspection at the
Office of the Secretariat, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st St., NW, Washington, DC 20581. Copies of
the proposal can be obtained through the Office of the Secretariat by
mail at the above address or by phone at (202) 418-5100.
    Other materials submitted by the CME may be available upon request
pursuant to the Freedom of Information Act (5 U.S.C. 552) and the
Commission's regulations thereunder (17 CFR part 145 (1987)), except to
the extent they are entitled to confidential treatment as set forth in
17 CFR 145.5 and 145.9. Requests for copies of such materials should be
made to the FOI, Privacy and Sunshine Act Compliance Staff of the
Office of the Secretariat at the Commission's headquarters in
accordance with 17 CFR 145.7 and 145.8.
    Any person interested in submitting written data, views, or
arguments on the proposal, or with respect to other materials submitted
by the CME, should send such comments to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
St., NW, Washington, DC 20581 by the specified date.

    Issued in Washington, DC, on May 17, 1999.
John R. Mielke,
Acting Director.
[FR Doc. 99-12879 Filed 5-20-99; 8:45; am]

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