MEMORANDUM
TO: The Commission
FROM: The Division of Trading and Markets
RE: FutureCom, LTD. Proposed Application for Designation as a Contract Market for Automated Trading over the Internet of Cash-Settled Live Cattle Futures and Options Contracts.
RECOMMENDATION: That the Commission approve the proposed designation application of FutureCom, LTD. and proposed Bylaw Sections 1.1-1.27; 2.1-2.7; 3.1-3.4; 4.1-4.16; 5.1-5.6; 6.1-6.16; and 7.1-7.2 and issue the attached Order designating FutureCom, LTD. as a contract market for automated trading over the internet of cash-settled live cattle futures and options contracts
CONSULTED: Division of Economic Analysis
Office of General Counsel
Division of Enforcement
Office of the Executive Director
STAFF CONTACT: Lois J. Gregory (x5483)
Table of Contents
G. Modification and Cancellation of Resting Orders
XI. PUBLIC COMMENTS ON THE PROPOSAL
By letters and submissions dated January 17, 1997 through February 2, 2000, FutureCom, LTD. (“FutureCom”), a Texas Limited Partnership, submitted an application to the Commission pursuant to Section 6 of the Commodity Exchange Act (“Act”) for designation as a contract market in cash-settled live cattle futures and options contracts, along with proposed Bylaw Sections 1.1-1.27, 2.1-2.7, 3.1-3.4, 4.1-4.16, 5.1-5.6, 6.1-6.16, and 7.1-7.2.
FutureCom has not been designated previously as a contract market for any contract and would be an entirely new exchange. FutureCom would be unique among currently operating contract markets in four primary ways. First, it would be the first internet-based contract market. Second, it would not be a member-owned exchange, but would be operated by its owner-developers with the objective of earning a profit.1 Third, every FutureCom member would also be a clearing member. Although members and non-members could be authorized to place orders on the system on behalf of members, they would not be holding margin funds for those trades.2 All FutureCom members’ funds would be held in one separately and specially titled pooled account at the clearing bank.3 Fourth, FutureCom would require initial margin to support any new position of any member to be on deposit with the clearing bank before the order could be accepted by the computer system for execution.
The Commission published a Federal Register notice requesting comments on the proposed application on January 31, 1997 (62 FR 4730), and again on November 24, 1997 (62 FR 62566). Both comment periods were for sixty days.4 A total of thirty comment letters were received in response to both notices. Twenty-four of them were supportive and six of them were non-supportive.
The one-year statutory time period for consideration of FutureCom’s application has been stayed on three separate occasions because FutureCom’s application lacked sufficient information for evaluation by Commission staff. Stays were lifted upon the applicant providing information staff needed to continue in its evaluation of the application. A stay imposed on April 15, 1997 was lifted on May 13, 1997 and a stay imposed on June 20, 1997 was lifted on November 18, 1997. The last stay, imposed on March 23, 1998, was lifted by letter dated January 19, 2000. Commission staff has conducted two-on site visits to FutureCom headquarters in Amarillo, Texas as part of its review of the FutureCom application.
As proposed, FutureCom would be an automated exchange that would operate entirely over the internet through member connection via either FutureCom’s secure server or electronic mail communication. Trading hours would be from 9:00 a.m. to 1:00 p.m., Central Standard Time (“CST”), Monday through Friday (except for national bank holidays). The Exchange would be governed by a ten-member Board of Directors, two of whom would be public directors, and all of whom would be appointed by FutureCom’s developer. FutureCom would be operated initially by a staff of ten persons each of whom would be responsible for certain aspects of Exchange operations, support, and service.
To be accepted as a member, an individual or organization would have to apply to FutureCom and meet strict creditworthiness and other standards. Based on the financial information in each application, a member would be assigned to one of five membership levels which would, in turn, dictate its specific margin requirements and position limits.
Upon accessing FutureCom’s website, approved members would have to enter a password and ID number in order to connect with FutureCom’s secure server. Orders that were entered into the system would be matched in accordance with FutureCom’s pre-established trade-matching algorithm by a computer-run program. FutureCom would transmit trade confirmations, variation margin calls, and other communications to its members by electronic mail. FutureCom contends that since human intervention into ongoing operations would be minimal, the system would generate a superior audit trail which would be used in implementing the Exchange’s trade practice and other surveillance programs. FutureCom has contracted to have the National Futures Association (“NFA”) perform financial surveillance and other audit functions on behalf of the Exchange with respect to its members who are Commission registrants.
Trading and clearing would be integrated and highly automated. FutureCom’s clearing operations would take place through its clearing bank, the First National Bank of Amarillo, Texas. No member could establish a new position unless it had sufficient initial margin in its FutureCom account at the clearing bank. Each trading day, after the Exchange closed, the FutureCom system would automatically mark-to-market all open positions and send to the clearing bank the various collections and payments made on behalf of, and the resulting balances in, each member’s account. FutureCom staff would monitor account balances during the trading day and make intra-day margin calls as deemed necessary. All the members’ accounts together would comprise FutureCom’s pooled account at the clearing bank. FutureCom would not deposit any funds into that account, nor would it be used for payment of FutureCom’s operating expenses.
Margin calls would be issued automatically to each member by electronic mail. The clearing bank would initiate the transfer of funds from members’ personal bank accounts to the FutureCom pooled account at the clearing bank. All of the information required to be sent and received throughout the clearing process would be done by the system with little or no human intervention. If a member did not meet a margin call, the system would recognize the deficiency and automatically alert FutureCom staff. FutureCom staff would liquidate all the positions in the defaulted account at the beginning of the next trading session in a manner which minimized losses in the account.
Members of the public responding to the Commission’s request for comment stated, among other things, that FutureCom would provide a much-needed additional futures contract to the industry and that an internet-based exchange would provide advantages for traders that other exchanges could not provide, such as low cost execution, real-time account information, and easy accessibility. Critical commenters expressed, among other things, a high degree of concern over certain issues regarding the use of the internet as a basis for trading futures and the capacity of FutureCom to perform the clearing function and carry out adequate trade practice and other surveillance programs.
This Memorandum also discusses the mechanics of the clearing system; the financial safeguards underpinning the operations of the Exchange; the proposed trade practice, market and financial surveillance programs of FutureCom; the governance structure of the Exchange; the conditions for access to the Exchange; the manner in which orders would be executed; the system’s security, vulnerability, and capacity; and other operational issues.
The Division of Economic Analysis will discuss the terms and conditions and the economic justification for the proposed cash-settled live cattle futures and option contracts in a separate Memorandum to the Commission.
Accompanying the Memoranda are two Orders which the Commission would issue in designating FutureCom as a contract market in cash-settled live cattle futures contracts and in option contracts on those futures contracts. These Orders contain the conditions FutureCom must meet to become designated, to remain designated, and to begin operations.
B. Applicability of Commodity Exchange Act and Commission Regulations
FutureCom would be both a contract market and self-regulatory organization and would be subject to the regulatory framework that applies to contract markets under the Act. The regulatory provisions that apply to exchanges in their capacity as contract markets include those governing the handling and treatment of customer funds, records of orders and executions, maintenance of a program for enforcing rules, disciplinary procedures, position limits, trading standards, registration of broker associations, and arbitration.
Provisions that apply to exchanges as self-regulatory organizations include those pertaining to minimum financial requirements for certain members, use of material non-public information, and eligibility for and composition of the governing board and major disciplinary committees.
Due to the automated nature and structure of FutureCom and its attendant lack of a physical trading floor, a number of the regulatory provisions that would otherwise apply to contract markets do not apply to FutureCom. For example, the requirement of Commission Regulation 1.35(f) that each contract market provide for the identification of floor brokers, traders, and clearing members by use of a distinctive, non-variable designation for each is not applicable to FutureCom. The Exchange would not have to comply with this requirement as it would not have a trading floor upon which FutureCom members would congregate. In addition, all members would be clearing members.
In discussing the various aspects of the proposed operations of FutureCom, this Memorandum will assess how FutureCom would be able to operate in a manner consistent with the Act and the Commission’s regulations and would otherwise meet all the requirements to be designated as a contract market. Attached to this Memorandum as Appendix A is a chart which specifically cites how FutureCom would address each provision of the Commission's regulations that applies to contract markets. For those provisions of the regulations requiring FutureCom to take or not take certain steps or procedures, FutureCom has submitted in each instance an affirmative representation.
FutureCom is a Texas limited partnership.5
REDACTED MATERIAL SUBJECT TO CONFIDENTIAL TREATMENT
Unlike currently operating exchanges, FutureCom would not be owned by its members. Neither the Act nor the Commission’s regulations, however, mandate any particular form of organization for a futures exchange. Division staff has analyzed FutureCom’s ownership structure, the relationships within that structure, and possibilities of abuse of power or information that would be inconsistent with the Act or the Commission’s regulations. In order to address this situation, FutureCom represents that neither Texas Beef nor any of the partners that own Texas Beef will become members of FutureCom or otherwise trade on the Exchange. If Texas Beef or its partners later determined to become members of the Exchange, they would do so only in accordance with procedures that had been submitted to the Commission for review.6 FutureCom also would have rules governing members who possess material, non-public information. These rules would meet the requirements of Commission Regulation 1.59.7
The affairs of FutureCom would be managed by its Board of Directors which would also oversee the business conduct of its members. FutureCom Bylaw 1.1 authorizes the FutureCom Board to establish classifications of membership and the qualifications that an applicant must meet. The Board also is authorized to amend the Bylaws and to adopt other rules and interpretations that are deemed necessary or appropriate.
The Bylaws provide that there will be no fewer than nine nor more than thirteen members of the Board. FutureCom anticipates that its initial Board will consist of ten members. The directors of the Board will be appointed by the General Partner of all of the Texas Beef Group of integrated companies to serve for a term of one year or until the director’s successor has been appointed, whichever occurs later.8
Although the FutureCom Board of Directors will be chosen by FutureCom’s general partner, FutureCom represents that the members of the Board would be expected to exercise the same independent judgment that members of any Board of Directors are expected to exercise. Pursuant to FutureCom Bylaw 1.10, directors may only be removed for cause. Moreover, as required by Section 5a(a)(14)(B) of the Act and Commission Regulation 1.64, at least 20% of the members of the Board of Directors would be public representatives. Although the governing structure and organization of FutureCom is very similar to that of other exchanges, FutureCom points out that it would not, in contrast to other exchanges, be member-owned. It would be owned by its developers and operated for the objective of making a profit for its owners.9 Any rule change adopted by the Board of Directors would, of course, would be subject to review by the Commission.
Commission regulations under the Act set forth requirements regarding service on, and composition of, the governing board of a self-regulatory organization. For instance, Regulation 1.63 requires an exchange to prohibit persons from serving on its governing body if they have, among other things, been found guilty of a disciplinary offense within the last three years, been suspended from trading on any contract market, had their registration revoked within the past three years, or been suspended from serving on a governing board under federal securities laws. FutureCom Bylaw Section 1.2(c) would satisfy this regulation by requiring that no individual may serve on the Board of Directors if he or she is subject to any disqualification under Commission Regulation 1.63(b).
Commission Regulation 1.64 requires each exchange to maintain in effect standards and procedures with respect to the composition of its governing board. These standards must ensure that 20% or more of the regular voting members of the Board are persons who are knowledgeable about futures trading and, among other things, are not members or employees of the exchange. At least ten percent of the Board must be comprised of persons representing farmers, producers, merchants, or exporters of commodities. The Board must also represent a diversity of the membership interests at the exchange.
FutureCom Bylaw 1.2(b) meets this requirement by mandating that at least 20% of the members of the Board be “public directors.” FutureCom represents that at least 10% of the Board members will be farmers or beef producers or exporters. As required by subsection (d) of Regulation 1.64, FutureCom, within 30 days following the date the individuals have been appointed to the Board, will submit to the Commission a list of the Board members, the membership interests they represent, and a description of how the members meet the compositional requirements of Regulation 1.64.
The Board would have regular and special meetings preceded by notice to the directors, although the Board could also take action without a meeting by electronic mail consent of all the directors. At any meeting at which a quorum was present,10 the act of a majority of the directors present would be an act of the Board. In the event of an emergency, as defined in FutureCom Bylaw 1.9, the Board may, upon a vote of two-thirds of its members at a meeting at which a quorum was present, place a temporary emergency rule into immediate effect, without prior Commission approval and without compliance with the non-emergency rule review provisions of Section 5a(a)(12)(A) of the Act and Commission Regulation 1.41. Bylaw 1.9 incorporates the requirements of Commission Regulation 1.41(f) governing exchange temporary emergency rules. (See Appendix A, page 5.)
As required by Regulation 1.69, FutureCom’s Bylaw 1.16 provides that no member of the Board may vote on any matter in which the named party in interest is the Board member or his employer, employee, or any other person that has a business, employment, or family relationship with the Board member that would warrant abstention. No Board member may vote on an action that would not be submitted to the Commission for prior approval if the member knowingly had a direct or substantial interest in the result of the vote, based on positions held either personally or at an affiliated firm. Consistent with Regulation 1.69, Bylaw Section 1.16 establishes procedures for determining whether a member must abstain from deliberating or voting in any particular matter.
FutureCom would have two committees to assist and advise the Board in conducting Exchange affairs. Although the FutureCom Board of Directors would have the ultimate authority in managing FutureCom’s operations, an Executive Committee would be empowered to conduct the routine day-to-day affairs which might require prompt decision making and flexibility. FutureCom’s developer believes it would be highly impractical, if not impossible, for the full Board to fulfill this function. Accordingly, FutureCom Bylaw 1.14 establishes a five-person Executive Committee to manage the Exchange on a daily basis. The Executive Committee would consist of the Chairman of the Board (Mr. O’Brien), the President of the Exchange (David Huseman), and three other directors appointed by the Board.
Like Bylaw 1.2(b), Bylaw 1.14 requires 20% of the members of the Executive Committee to be public directors as that term is defined. Therefore, the Executive Committee, in addition to being drawn from a body that meets the Commission’s compositional requirements, would separately meet the compositional requirements of Regulation 1.64. (See Appendix A, page 9.)11 The Executive Committee may not authorize distributions, fill vacancies on the Board or any committee, elect or remove officers, fix the compensation of any member of the Executive Committee, or amend, alter, repeal, or take action inconsistent with any resolution or action of the Board of Directors, when the resolution or action provides by its terms that it shall not be amended, altered or repealed by action of a committee. Executive Committee members, like members of all FutureCom committees, would serve for a term of one year or until their successors have been appointed. The FutureCom Board has veto power over anything the Executive Committee decides and thus retains ultimate authority over the affairs of FutureCom.
FutureCom also would have an Advisory Committee comprised of eight individuals who are FutureCom members, or representatives of member firms, appointed by the Chairman of the Board and approved by the full Board. The Advisory Committee may not have Board of Director members as committee members. The Advisory Committee would advise and make recommendations to the Board with respect to all aspects of the business and operation of FutureCom.12 The Committee would not be entitled to vote on any substantive matter. Proposed Bylaw 1.15 would require the Advisory Committee to meet compositional requirements similar to those contained in Commission Regulation 1.64.
The Board of Directors could create and utilize other committees. As with FutureCom’s Executive Committee, the Board would retain ultimate veto power over the action of any created committee that it created.
The FutureCom Board would appoint a President, Secretary and Treasurer who would fulfill the duties of these offices as described in the Bylaws and as determined by the Board. They would serve at the pleasure of the Board and may be removed at any time. The Bylaws provide for indemnification of officers, directors, and others who become parties to legal proceedings as a result of the person being a director, officer, or employee or agent of FutureCom. FutureCom will not, however, indemnify its officials for civil monetary penalties imposed by the Commission under Section 6b of the Act.13
FutureCom’s Bylaws also address the use of material, non-public information by any officers or directors in accordance with the requirements of Commission Regulation 1.59. (See Appendix A, page 7).
No person could access the FutureCom trading system other than a member or person authorized to act as an intermediary on behalf of a member.14 In order to become a member, a person must apply and be approved by FutureCom. Prior to becoming designated as a contract market, FutureCom will have in place a Board Resolution which warrants that all solicitations made by FutureCom for memberships will conform to NFA Compliance Rule 2-29, as appropriate.
Although any member of the public would be able to access the general FutureCom website over the internet, persons would not be able to access the website’s order-entry functionality without entering their personal password, user ID number, and account number. These procedures should enable FutureCom to monitor and control access to its trading system and particularly to prevent access by unauthorized users via the internet.
Each approved member would be assigned to one of five membership classes. The Bylaws provide that membership in FutureCom is available to individuals and organizations that satisfy the minimum financial requirements established for the membership class for which the individual or organization has applied and that are otherwise found to be qualified for membership in FutureCom. Each applicant for membership as a member organization must designate an individual who would be authorized to represent the organization. Every member also would be a clearing member of FutureCom.
Position limits for FutureCom members would be set in accordance with each members’ “membership class.” There would be separate position limits for each contract month and for the period ten days prior to expiration of a contract. Each membership class would have the following minimum financial requirements:
Class 1 Members: must maintain net worth in excess of $50 million and have annual income exceeding $20 million.
Class 2 Members: must maintain net worth in excess of $20 million and have annual income exceeding $5 million.
Class 3 Members: must maintain net worth in excess of $1 million and have annual income exceeding $500,000.
Class 4 Members: must maintain net worth in excess of $200,000 and have annual income of at least $100,000.
Class 5 Members: would not be subject to any minimum financial requirements, but would be required to have their FutureCom transactions guaranteed by a person that has been approved as either a Class 1 or Class 2 member of the Exchange.15
Each applicant must submit to FutureCom any pertinent information requested by the Exchange. Each applicant would undergo a credit and background check which must prove satisfactory to the Board. FutureCom staff would compare the names of all applicants for membership in the Exchange, and their principals, with the names on the administrative and reparations sanctions in effect list maintained by the Commission and available on the Commission’s internet site and would reject any applicant who appeared on that list. The Board of Directors would review all applications for membership and may approve, deny, or condition an application as the Board sees fit for the protection of the other members of FutureCom.
Upon approval for membership, FutureCom would assign the new member a user ID number, an account number, and a password. The member would have to use all of these codes to gain entrance to the secure FutureCom trading site server. Members obtain access through the internet on their own personal computers. Valid codes would be necessary to execute transactions on FutureCom as well as to access any information in the member’s account. Each member would be responsible for the selection of an internet access provider and an alternative access provider.
All communications between FutureCom and its members, including confirmations of all transactions executed for or on behalf of the member’s account, margin calls and all other information regarding the member’s account, would be transmitted by electronic mail. The Exchange would require all members to confirm a valid electronic mail account with the FutureCom mail server. Each member would be responsible for promptly viewing, and if required, responding to all electronic mail. Member meetings also would be held by electronic mail.
Many of the requirements for members contained in the Bylaws are also found in the FutureCom Account Agreement, an agreement each member must sign before accessing FutureCom for trading purposes. The Agreement covers many general legal contractual provisions, and other FutureCom-specific provisions such as a consent to the clearing arrangement, margin and default provisions, position limits, an electronic services agreement, trading fees, FutureCom’s limitation of liability, order entry and matching rules, duty to notify of changed financial condition, termination of a member’s account, agreement to arbitrate, and other matters.
FutureCom’s Account Agreement also contains provisions similar to those in agreements entered into between clearing members and currently operating exchanges.16 This includes agreement that members are subject to all the rules of the Exchange, that the members authorize the Exchange to provide required information to the Commission, and that members represent that entering into the agreement does not violate the members’ own charter, Bylaws, or partnership agreement, if applicable. The FutureCom Account Agreement would be executed electronically but each member also would be required to execute a separate version of the full agreement in hardcopy. Other major provisions and sections of the Account Agreement are discussed in the section below and elsewhere.
This first section of the Account Agreement imposes several responsibilities and obligations on members. Among other matters, the Agreement provides for joint and several liability if there is more than one member or named person in an account.17 In such cases, each individual would jointly and severally agree that he or she has the authority to enter orders, to receive notices, confirmations and other communications, to contribute margin and to receive funds without notice being given to the other joint account holder.
The Agreement authorizes FutureCom to follow the instructions of any party who authorizes a new account application. In this regard, FutureCom would have no duty to inquire into the purpose or propriety of a demand for delivery of securities or funds in connection with a FutureCom account. Likewise, FutureCom also would not be liable in the event of conflicting instructions with respect to one account.
Each applicant must agree to be responsible for receiving, reviewing, and responding to electronic mail, which would be FutureCom’s sole method of verifying transactional information. All trades would be subject to the rules of FutureCom, the Commission’s regulations and any other applicable federal or state law.
Pursuant to the Account Agreement, each member would consent to the custodial and clearing services provided by FutureCom. When authorized by the member, FutureCom would execute electronic debits or credits to the member’s separate bank account established for this purpose at the First National Bank of Amarillo. FutureCom would set trading fees according to the profile of each member as to expected volume, experience, and financial worth. The fees would be set forth in the Agreement separately for futures, spreads and options. Fees would be deducted from the member’s account at the time a trade was executed.
The only other charges a member could incur would be charges associated with the electronic transfer of funds from the member’s bank account to the FutureCom pooled account at the clearing bank for various purposes, such as depositing initial margin or meeting variation margin calls. The fees would be charged to the member’s account at the time the transfer was processed. FutureCom would not impose clearing fees.18
Each member must agree that available funds for initial margin for any order must be on deposit in the pooled account at the clearing bank before any transaction could be executed. Minimum maintenance margin of at least 1.5 times the maximum allowed daily price move of the contract traded would be required and FutureCom could liquidate any trade not settled according to the terms of a margin call.19 Failure to meet a margin call would be considered a default and all the member’s positions would be liquidated at the beginning of the next trading session in a manner to minimize losses to the account. Monies transmitted to FutureCom by members would first be applied to the member’s outstanding margin calls and could not be used to support new positions until all margin calls had been satisfied. FutureCom may liquidate any securities accepted as margin in the event of a failure to meet a margin call or if the position was liquidated and the sale was necessary to satisfy remaining obligations to the Exchange.
The only securities acceptable as margin for trading on FutureCom would be U.S. Government Treasury obligations. These would be maintained in a separate custodial account at the clearing bank.20
The FutureCom Account Agreement between FutureCom and each member would set forth the position limits specific to that particular member based on the member’s membership classification and other factors specific to the member. The Agreement would list position limits for each contract month and for the period ten days prior to expiration.
Members must agree to provisions intended to address various operational aspects of the electronic FutureCom system. As account owners, members agree to protect their system access codes and to inform the Exchange of any inadvertent disclosure of the codes. All transaction and trading information would be transmitted by electronic mail. FutureCom would not be deemed to have received an order until it sent the member an assigned order number which was designated at the completion of the order entry routine.
FutureCom would not be responsible for the member’s internet service provider, the internet system or access to FutureCom’s server. Members would be responsible for their internet access options. The Exchange does not warrant any order entry, quote, or order execution speed to any member. In fact, the Exchange would disclose that response times would vary according to the traffic on the internet at any particular time. FutureCom would close the Exchange if it determined that internet services or any of the electronic systems were impaired sufficiently so as to harm trading on the Exchange, or FutureCom’s servers were incapable of managing the orders. The procedures for closing the Exchange are discussed in more detail in Section IX., below.
Each member must agree that if the member failed to notify FutureCom within 24 hours of a mistake on the part of the Exchange in handling or processing a transaction, FutureCom would not be responsible. FutureCom would provide a Help Desk which could assist a member in entering an order by telephone. This service would be for a fee as posted on the public folders of the Exchange’s website. All calls to the order entry desk would be recorded and FutureCom would only be responsible for errors that violated the order instructions given by the member.
Each FutureCom member must agree that he or she understands that trading on the internet involves many interrelated components which may be subject to faults, failures, malfunctions, and other impacts that could adversely affect the ability to trade. The Account Agreement states that FutureCom would not be responsible or liable for any failure to execute orders as intended. Failures may be caused by interruption or disruption of the power supply or phone lines, or by natural disasters or other causes. Trading also may be subject to disruption from hardware or software failures anywhere on the internet connection including the client or host computers. FutureCom further notes that nothing in their statement limiting its liability is intended to limit the liability of any person as may be provided in the Act or the Commission’s regulations or as a result of willful or wanton misconduct or fraud. With respect to orders sent to the Help Desk, as stated, the Account Agreement would provide that FutureCom would only be responsible for errors that violated the order instructions given by members. These provisions are consistent with the Act and are substantively identical to limitation of liability provisions previously approved by the Commission.21
Each member must agree to arbitrate any disputes that might arise as a result of transacting business on FutureCom.22 Each member would agree that the arbitration would be binding. Any dispute, controversy or claim between members arising out of or relating to transactions on FutureCom may be submitted to arbitration in Amarillo, Texas, before a panel of three arbitrators. Each member would select one arbitrator. These two arbitrators together would then select a third. All arbitrators must be knowledgeable in futures trading or the regulation of such trading. All member arbitration proceedings would be conducted in accordance with the rules of the American Arbitration Association. The decision of the arbitrators would be final, and judgment upon any decision rendered could be entered in any court, state or federal, having jurisdiction. Unless the arbitrators found that one of the parties acted in bad faith, each party would pay its own expenses, and the expenses of arbitration would be equally divided between the parties. American Arbitration Association procedural requirements satisfy Part 180 of the Commission’s regulations and their minimum requirements for fair and equitable arbitration proceedings.23
FutureCom would reserve the right to terminate a member’s Account Agreement at any time for any reason. Such termination would not affect the obligations or liabilities of the parties incurred or arising from transactions initiated under the Agreement prior to the termination, including the provisions regarding arbitration which would survive any termination of the Agreement. Upon termination, it would be the member’s responsibility to issue instructions with regard to assets held at FutureCom. Unless and until FutureCom received the member’s instructions, FutureCom would not be under any obligation to take any action with regard to the member’s assets. The member also would be responsible for any transaction costs associated with instructions, including commissions and related costs.
In addition to the FutureCom Account Agreement, a member would not be permitted to enter into and execute an order through FutureCom until the member had acknowledged receipt of the Risk Disclosure Statement prepared by FutureCom. Part One of the Statement contains the risk disclosure prescribed by Commission regulations and describes the risks inherent in trading on futures and options on futures contracts generally, wherever traded. Part Two describes certain risks that are unique to trading on electronic exchanges in general, and on FutureCom, in particular.
Part Two states that trading on FutureCom may not be appropriate for all parties and that FutureCom is different from conventional futures exchanges in a number of important respects. The disclosure informs members that they would be responsible for protecting system access information and for the costs of any losses incurred on any trades made using that information. The disclosure reminds members that an order would not be accepted for execution unless initial margin was on deposit and that all orders would be deemed to have settled and cleared immediately upon execution on the Exchange. If a margin call was not met, FutureCom would automatically liquidate the member’s account by creating a market order(s) that would offset the member’s positions and enter them in a manner designed to minimize losses. Members would be responsible for receiving and responding to any electronic mail from the Exchange.
Part Two of the Risk Disclosure Statement also makes clear that FutureCom would not be responsible for a member’s inability to enter or cancel an order due to the temporary disruption or failure of the computer-based component systems maintained by FutureCom. The disclosure describes various conditions which could affect the ability of a member to trade and reminds the member that he or she accepts the risk that, if the member is unable to trade on FutureCom or capacity to trade is impaired, the value of the member’s portfolio may be adversely affected. The Statement also describes situations involving system disruption or failure for which FutureCom officials could close the Exchange or take other emergency action.24
FutureCom expects that most members will enter all of their own orders into the system and that members would not typically use another person to enter their orders. However, as mentioned, FutureCom members may authorize other persons, intermediaries, to enter orders into the system on their behalf. Members might use an intermediary, for example, if they are not comfortable using computers or if they desire to trade at a time when access to a computer was not possible.
Intermediaries would be able to enter discretionary or non-discretionary orders on behalf of FutureCom members using the intermediary’s user ID number and password, and the member’s account number. FutureCom member intermediaries would be subject to heightened scrutiny under FutureCom’s trade practice surveillance procedures which specifically require compliance staff to create a report which would identify instances in which any member-intermediary may have traded ahead of the member.25 An intermediary would never handle the funds of the FutureCom member for which the intermediary is entering orders.26
With limited exception, all intermediaries must be FutureCom members. FutureCom would have to approve the appointment of any non-member as an intermediary. The Exchange may approve a non-FutureCom member that was a Commission registrant (for example, a CTA) as an intermediary, or in some cases, approve a non-member, non-Commission registrant when the intermediary has an existing business or personal relationship with the FutureCom member that is unrelated to futures trading; for example, a spouse of a member. In this case, the intermediary would be required to consent to FutureCom’s jurisdiction with respect to all activity on the FutureCom system.27
The Exchange prefers and anticipates requiring that most, if not all, appointed intermediaries would be both FutureCom members and Commission registrants and that it would be the rare instance in which that was not the case. As a Commission registrant an intermediary would be a member of the NFA and be subject to NFA oversight in accordance with an agreement between FutureCom and NFA for NFA to perform the DSRO functions of financial and recordkeeping surveillance.28
An intermediary would not be able to enter orders for multiple accounts. The intermediary would have to exit the secure portion of the FutureCom website and then log on again using the same ID number and password, but the account number for the next account, if any, for which the intermediary was authorized to enter orders.29
As a Commission registrant, an intermediary would have to comply with the Commission’s relevant recordkeeping regulations - Regulation 1.35 for FCMs and IBs and Regulation 4.33 for CTAs. The Exchange believes that the electronic nature of its system would enable intermediaries to take advantage of the Commission’s advisory concerning an alternative method of compliance with the written record requirements of Regulation 1.35.30 The advisory declares that the written record requirements of Regulation 1.35 will be deemed satisfied, subject to certain conditions, by an electronic system that generates particular records for orders entered into it.
Under FutureCom Bylaws,31 members who allow a Commission registrant intermediary to enter orders could arbitrate claims against the intermediary at NFA in accordance with NFA’s current arbitration procedures. Since typical intermediaries would be Commission registrant members of FutureCom, they would be subject to NFA’s sales practice and financial surveillance programs. As such, they would be required to distribute to customers a list of organizations that are qualified to conduct customer arbitration proceedings. Such list must include a registered futures association (i.e., NFA, the only registered futures association at this time). Furthermore, NFA is required to accept any demands for arbitration against a registrant NFA member arising out of a futures-related dispute under Section 2 of NFA’s Code of Arbitration. Since arbitration proceedings conducted at NFA comply with Commission regulations, FutureCom members employing a typical intermediary to enter orders on their behalf would be able to arbitrate disputes with that intermediary under procedures that meet Commission standards. Cases in which an intermediary that entered orders on behalf of a FutureCom member was not a FutureCom member and not a CTA or otherwise registered with the NFA could still be subject to arbitration at FutureCom, if the member elected, as such intermediary would have consented to FutureCom’s jurisdiction under FutureCom Bylaws.
FutureCom members and intermediaries would enter orders for their accounts and the Exchange would maintain an electronic record of those entries. Members would be financially responsible for all of their orders. Once an order was entered, the system would re-display the details of the order to the party who entered the order and request that the originator affirmatively confirm that all the order information was correct and should be made final. Final orders would be entered into the system and immediately be eligible for matching. The FutureCom system is designed to match trades on a strict price/time priority basis, meaning that resting orders at a given price would be filled in the sequence in which they were entered into the system.32 Pursuant to the FutureCom Account Agreement, members agree to be bound by the order once executed. Each member would be responsible for disclosing to FutureCom prior to order entry the name of any party the member desired to authorize to enter orders on FutureCom on the member’s behalf.33
The FutureCom system would accept the following types of orders; limit; market; stop; and market-if-touched (“MIT”). All orders could be entered either as day-only or “good until filled” (“GTF”). A day-only order would be canceled automatically if unfilled at the end of the day’s trading session, while the GTF designation would allow an order to remain eligible until matched or canceled. In either case, an order would stay open in accordance with its designated time limit even if the trader who entered it had exited the FutureCom website. There would be no default selection for order duration; a trader must select one option or the system would not accept his or her order.
Limit orders specify a price at which a trader wishes to buy or sell, and would match only at the limit price or better. Limit orders may receive partial fills, and unfilled portions would remain open at the same price and for the same duration as was specified when the order was originally entered. These unfilled portions would retain the time priority of the original order. Limit orders would be filled on an “at or better” basis, so that a buy limit order that was entered at a price above the current best offer to sell, would be matched with all the outstanding sell limit orders in price/time priority until the limit price was reached, or the order was filled completely.
Market orders to buy (sell) would hit the best available limit offers (bids) in price/time order until the market order had been filled in its entirety, or until there were no more opposing limit orders against which it could be executed. If the latter occurred, i.e., if the market order had disposed of all orders on the opposite side of the market, then any unfilled portion of the market order would be canceled automatically. Similarly, the system would not accept a market order if there were no limit orders on the other side of the market against which it could be executed. Market orders cannot execute against each other. By nature, market orders either execute instantaneously or not at all, so traders do not specify a time duration for them.
Stop and MIT orders would be treated identically, the only difference between them being that they would be entered on different sides of the market. (A sell stop is placed below the current market price, while a sell MIT is placed above it, and the reverse is true for buy orders.) Stop orders are generally employed to stop losses, while MIT orders are used in the same fashion as limit orders. Stops and MITs are much more likely to be executed in their entirety, because they would become market orders when triggered. This means, however, that they could be executed at a price worse than the trigger price. Conversely, limit orders cannot be executed at a price worse than the limit, but for this reason may not be filled completely when the limit price was reached.
Both stop and MIT orders would be entered at a particular stop price, and when the market traded at or through that price, the stop or MIT order would become a market order and execute immediately against whatever opposite orders were available, in their order of priority. Unlike regular market orders, however, unfilled portions of triggered stop and MIT orders would not be canceled, but would remain open and be executed against the first limit orders entered on the opposite side of the market.34
All traders would access the FutureCom system via the internet by accessing the Exchange’s World Wide Web site. Although portions of the website would be accessible to the general public, access to trading pages necessary to conduct and review trading activity would require a FutureCom ID, password, and account number.35 When entering an order, a trader would first encounter a screen where he or she must indicate whether to buy, sell, or spread, and what contract to trade. If a buy or sell order was selected, the trader would then be presented with an order entry screen and a display of the current best five bids and offers in the front month of the contract selected. This display could be modified by the trader to show the best five for any listed month of that contract. On the order entry screen the trader must enter his or her desired contract quantity, contract month, order type (market, limit, stop, or MIT), price (except in the case of market orders), and the time limit (day only or GTF). For spread orders, a trader must select the number of contracts, time limit, the buy and sell months, the desired price differential, and whether the premium will be for the buy or sell month.36
If any of the required information was not entered, the system would reject the order and inform the trader what was missing. If the form was complete when submitted, the system would then display a page showing the terms of the order, as well as the trader’s account balance, the initial margin required for the order, the commission that would be charged, and the account equity remaining available for trading. This would provide the trader with an opportunity to review the terms of an order before it was entered. If the trader wished to revise the order, he or she could return to the order form by pressing the “Back” button on his or her browser. If the trader entered the order as is, the system would display a confirmation page showing the same information, plus the notice “Order Successfully Entered” and an order number assigned by the system.
Once logged on to the system, traders on FutureCom could only enter orders for the account associated with the user ID entered during the log-in. In most cases, this would presumably be the trader’s personal account. However, an Exchange member may authorize an intermediary to enter orders on behalf of the member.37
When a trade was matched by FutureCom’s trading system, a notice of fill would be sent immediately to each trader via electronic mail, showing the order number, price, time of fill, and quantity. Traders could also check the status of their orders on the Exchange website using the Open Orders screen, which would show all of their active unfilled orders, or the Open Positions screen, which would show all open positions (including offsetting positions which have not been matched and formally closed).38 Additionally, the Closed Position History screen would allow traders to examine their last six months of trading activity (except for currently open positions), displaying each trade in a group with the one(s) against which it subsequently was offset. Nowhere in the FutureCom system would it be possible for a trader to discover the identity of the trader or traders on the other side of his or her transaction.
The FutureCom system would employ a procedure to determine an opening price for each trading session. It should be emphasized that the opening price would simply be an indicator to traders of where the market was – what other traders bid or asked before the market opened. The opening price would not be binding in any way and would not necessarily be the price at which trades entered before the trading session start time (9:00 a.m., CST) would be matched at the beginning of the trading session (also referred to as “the open”).39
For the live cattle contract, the initial contract that FutureCom proposes to list, the trading system would begin each session by reviewing all limit orders entered into the system since the close of the preceding trading session, and ascertaining the price at which the largest number of contracts could be matched (i.e., the “equilibrium price”). This would be the opening price. Its determination is illustrated in the following example:
Example: Assume the market opens at 9:00 a.m. and the following limit orders were entered before that time as shown:
Time
Price
Bids
Offers
Trader A
8:35 72.05 1
Trader B
8:40
72.05
1
Trader C
8:45
72.10
4
Trader D
8:50
72.10
3
Trader E
8:55
72.15
6
• Trader A’s offer of 1 entered at 72.05 at 8:35 would match with Trader B’s bid of 1 entered at 72.05 at 8:40
• Trader D’s bid for 3 at 72.10 entered at 8:50 would match with 3 of Trader C’s offer of 4 at 72.10 entered at 8:45.
• The opening or equilibrium price would be 72.10 as that would be the price at which the largest number of contracts, three, could be matched at the open.
In determining the opening or equilibrium price, if there were two or more prices with equal largest volumes, then those prices would be averaged to determine the opening price. If no trades could be matched before the open, then the opening or equilibrium price would be the arithmetic mean between the best pre-open bid and offer on the contract in question.
If no orders were received by the Exchange between the close of one trading session and the opening of the subsequent one, then the closing price for the first session would be the opening price for the second. In the event that a closing price was not established for that first session, then the opening price for the following session would be the “Five Day Weighted Average Price.” This price would be calculated by the Exchange using data from the U.S. Department of Agriculture’s “Five Area Weighted Average Report” for live cattle, and according to a formula described in Appendix 1 to the FutureCom Bylaws.
The opening price on the very first trading day for each live cattle contract month would be the settlement price from the previous trading session for the contract month immediately preceding the unopened contract month. If no such settlement price was calculated, then the opening price would be the Five Day Weighted Average Price for the previous day.
After the opening price was established, the market would open. At the open, orders that had been entered before 9:00 a.m., CST would be immediately matched according to the normal trade-matching rules, with one exception. At the open, limit orders which overlapped in price (bids higher than outstanding offers, or offers lower than outstanding bids) would be matched at a price halfway between the bid and offer. FutureCom states that since limit orders are executed on an “at or better than” basis it would serve as a reward to those who entered a pre-open limit order prior in time to the entry of the opposite pre-open limit order to execute at a price halfway between the two when the orders overlap. This should encourage the entry of more pre-open limit orders which would assist in developing an accurate opening price. (By contrast, overlapping limit orders entered after the open would be matched at the price of the first order entered in accordance with the normal priority rules.) The opening price calculations would not involve market orders which, although they may have been entered prior to the open, would not be processed until immediately after the open, in order of time priority. At the open, all, some, or none of the pre-open entered orders could get matched at that time.
The FutureCom servers would maintain a “book” of open orders to be executed in accordance with the system’s trade-matching algorithm. The algorithm would apply to all trades in the system, including those matched at the open, and, as stated, would follow a price/time priority rule.40
The price/time priority of the FutureCom trade-matching algorithm means simply that trades would be matched at the best available price, and orders at that price would be filled in the same sequence in which they were entered into the system. The following example, Example #1, illustrates this matching rule as applied to limit orders:
Example #1:
Assume limit bids and offers were placed at the following prices, times, and quantities:
Time
Price
Bids
Offers
Trader A
9:00
72.00
3 limit
Trader B
9:01
72.05
2 limit
Trader C
9:02
72.10
1 limit
Further assume that at 9:03 Trader D enters a limit offer at 72.00 for 4 contracts. The FutureCom system would execute the following transactions:
Time
Price
Quantity
C-D Trade
9:03
72.10
1
B-D Trade
9:03
72.05
2
A-D Trade
9:03
72.00
1
• Trader D’s limit offer of 4 would be executed at 72.00 or better. Following the rules of price/time priority, Trader C’s bid for 1 contract at the highest price, 72.10, would be matched against Trader D’s limit offer of 4 contracts.
• Trader B’s bid for 2 contracts at 72.05 would be matched against the remaining 3 contracts of Trader D’s offer
• One of Trader A’s bid of 3 contracts at 72.00 would be matched against the remaining contract of Trader D’s limit offer.41 Although Trader A’s bid would meet the terms of the limit offer (at 72.00 or better), and has time priority, it does not have price priority, and would be the last to be matched.
Market orders would be executed against the best available limit orders on the other side of the market in price/time sequence until they were filled, or until there were no more opposing orders left, as shown here in Example #2:
Example #2:
Assume limit offers were placed at the following prices, times, and quantities:
Time
Price
Bids
Offers
Trader A
10:00
72.00
3 limit
Trader B
10:01
71.95
2 limit
Trader C
10:02
71.90
1 limit
Trader D
10:03
71.85
1 limit
Next, assume that at 10:04 Trader E enters a market order to buy 3 contracts. The FutureCom system would execute the following transactions:
Time
Price
Quantity
D-E Trade
10:04
71.85
1
C-E Trade
10:04
71.90
1
B-E Trade
10:04
71.95
1
• Trader E’s market order is matched with the pending offers according to their price priority. Accordingly, Trader E’s order to buy 3 contracts is first matched against Trader D’s offer of 1 contract at 71.85
• It is then matched next against Trader C’s offer of 1 contract at 71.90
• It is then matched against one of Trader B’s offer of 2 contracts at 71.95, even though each of these offers was entered after Trader A’s offer of 3 contracts for 72.00.42
To be executable under FutureCom’s trade-matching algorithm, stop orders must be triggered by a trade executed at the stop price. A triggered stop order turns into a market order. The following example, Example #3, illustrates the triggering and execution of a stop order:
Example #3:
Assume that at 11:00 Trader A enters the following sell stop order43 into the system:
Time
Price
Bids
Offers
Trader A
11:00
71.90
6 Stop
Further assume that between 11:01 and 11:05, Traders B, C, D, E and F enter the following limit bid orders:
Time
Price
Bids
Offers
Trader B
11:01
72.00
3 limit
Trader C
11:02
71.95
3 limit
Trader D
11:03
71.85
6 limit
Trader E
11:04
71.90
2 limit
Trader F
11:05
71.90
3 limit
The FutureCom system would execute the following transactions:
Time
Price
Quantity
B-C Trade
11:02
72.00
3
E-F Trade
11:05
71.90
2
A-D Trade
11:05
71.85
6
• Trader A’s stop offer of 6 contracts at 71.90 entered at 11:00 is triggered and turns into a market order when the trade between Trader E and F was executed at the stop price of 71.90 at 11:05.
• Once the stop offer becomes an executable market order the rules of price/time priority apply. Accordingly, Trader A’s offer will be executed at 11:05 for 6 contracts against Trader D at 71.85.44
To be executable under FutureCom’s trade-matching algorithm, MIT orders also must be triggered by a trade executed at the MIT price. Like a triggered stop order, a triggered MIT order turns into a market order. The final example, Example #4, illustrates the triggering and matching of an MIT order:
Example #4:
Assume that at 12:00 Trader A enters the following MIT buy order45 into the system:
Time
Price
Bids
Offers
Trader A
12:00
71.85
4 MIT
Further assume that between 12:04 and 12:07, Traders B, C, D and E enter the following limit bid orders:
Time
Price
Bids
Offers
Trader B
12:04
71.95
2 limit
Trader C
12:05
71.90
1 limit
Trader D
12:06
71.85
3 limit
Trader E
12:07
71.85
1 limit
The FutureCom system would execute the following transactions:
Time
Price
Quantity
D-E Trade
12:07
71.85
1
A-D Trade
12:07
71.85
2
A-C Trade
12:07
71.90
1
A-B Trade
12:07
71.95
1
• Trader A’s MIT bid order of 4 contracts at 71.85 entered at 12:00 is triggered and turns into a market order when the trade between Trader D and E was executed at the MIT price at 12:07.
• Trader A’s bid will be executed against the remaining 2 of Trader D’s limit offer of 3 at 71.85, Trader C’s limit offer of 1 at 71.90, and 1 of the 2 of Trader B’s offer for 2 contracts at 71.95.46
If more than one stop or MIT order were entered at the same price and the stop or MIT orders were triggered, the stop or MIT order that was entered first47 would be filled first, and the stop or MIT order entered second in time would be filled next, and so on. There would be no allocation of fills among different MIT orders entered at the same price.
All types of orders other than market orders could receive partial fills, in which case the unexecuted portion of the order would remain in the system, retaining its time priority. With market orders, the unexecutable portions would be canceled immediately, thus market orders on FutureCom operate just like orders with a “fill or kill” qualifier attached. Unexecuted portions of triggered stop and MIT orders, however, would remain open as market orders, and would therefore execute against the next opposing limit order entered into the system.48 Unexecuted portions of triggered stop and MIT orders would remain in the system rather than being automatically canceled, as would unfilled portions of market orders, because stop and MIT orders can be used as tools by traders in lieu of watching the market, which is not always feasible, for the appropriate market situation in which to buy or sell. If unexecuted portions of triggered stop and MIT orders were canceled, the use of these types of orders for this purpose would be adversely affected.
It should be noted that orders would be matched sequentially in the FutureCom system; an order would not be matched until the system had completed matching the order directly ahead of it in priority rank. This means, among other things, that if the matching of one trade were to cause a resting stop or MIT order to convert to a market order, the triggering of that stop or MIT would not affect the execution of the first trade in any way. The triggered order would not be processed until the triggering order was completely matched.
There would be no separate market for spread orders at FutureCom; the legs of spread orders would be matched separately and simultaneously against straight buy and sell orders for the appropriate contracts. When a trader entered a spread trade, he or she would specify the quantity, what the buy month was, what the sell month was, what the differential should be, and whether the premium should go to the buy or sell month. Each leg of the spread would be treated as a separate order and each would have to be matched separately, but simultaneously, for the spread order to be executed. Spread orders could be specified to be GTF or good for that day only.
Mechanically, the system would list the sell leg of a spread as a limit offer at a price equal to the currently existing best limit bid in the spread’s sell month. The buy side of the spread would be listed as a limit bid at a price equal to the sell leg’s offer plus the price differential (when the premium was to the buy month), or minus the differential (when the premium was to the sell month). The bid for the buy leg would move in tandem with the sell leg offer as the latter followed the currently existing best limit bid of the sell month. Therefore, when the buy side of a spread matched with an offer, the sell side would be matched simultaneously with the already existing bid, and the spread would be executed.
For example, assume a spread order indicated that a premium of .20 should go to the sell month leg. The buy order would be placed as a limit bid at a price which equaled the current best limit bid price of the sell leg month, minus the differential. Assuming the best currently existing limit bid price of the sell leg month was 72.00, the sell leg of the spread would be placed as a limit offer at 72.00 and the buy leg would be placed as a limit bid at 71.80 (72.00 - .20). The limit offer of the sell leg would change as it followed the currently best limit bid in the sell month until the buy leg matched with an offer as it moved in tandem with the sell leg.
To illustrate, assume, in the example, that the limit offer of the sell leg (which is the same price as the best currently existing limit bid price of the sell leg) moved to 72.10. The buy leg limit bid would automatically move to 71.90 (72.10-.20). Assuming an offer was entered or already existed that matched the buy bid of 71.90, the spread would then execute as both legs could execute independently and would do so simultaneously.
The FutureCom system would allow traders to modify or cancel any unexecuted (or “resting”) orders they have entered. This would be done via the Open Orders screen, which displays all of a trader’s unfilled orders in chronological sequence, indicating the order number; date and time entered; contract and month; buy, sell, or spread; limit, stop, or premium price; quantity; and time limit. From this screen, orders may be canceled entirely, or modified via a Change Order screen at which the price of a resting order can be modified. The modified order, however, would lose its time priority and be sent to the end of the queue like any new order. As the Change Order screen would only allow changes to the price of an order, any other modifications to an order’s terms must be made by canceling it and entering a new order.
Once an order has been accepted into the system and matched with another order pursuant to the system’s trade-matching algorithm, a member may close or offset a position with another of the trader’s open, filled orders. Offsetting positions would be held open on FutureCom, until a member affirmatively closes a position by offsetting it with another offsetting open position in the system.49 The right half of FutureCom’s order entry screen would be dedicated to “closing an order.”50
After selecting the option to close a order, the screen would show a list of open, filled orders that could be closed, if chosen. After selecting a position to be closed, the system would ask which order should be used to close the chosen position and list the available possibilities. Upon the selection of an order to close a position, the system would display a confirmation page indicating by order number which position had been closed with which order. A similar procedure would be used to partially close a position. After a position was closed or partially closed, the trader’s account balance would reflect the financial result of the offset.
FutureCom members would receive most of the same type of information that is available to traders in open outcry pits. FutureCom believes that this flow of information should enhance the liquidity of contracts trading on the system. A FutureCom member who was working on his or her order entry screen would see a display of the current best five bids and offers in the front month of the contract selected. This display also could be changed to show the best five bids and offers for any listed month of that particular contract. This is the same level of transparency as the CME’s Globex trading system, but a greater level of transparency than the CBT’s Project A electronic trading system which displays only the current best bid and best offer.
The FutureCom system would not disclose to a trader the identity of the trader or traders on the other side of his or her transactions. FutureCom members should be able to make an assessment regarding the depth of market participation and the degree of participation by other traders at least equal to the assessment traders can make on the Globex, Project A, and NYMEX ACCESS trading systems. FutureCom would disseminate real-time market quotes for free on pages of its website that would be accessible to the general public.
The Division believes that the procedures described above for FutureCom order entry and execution and the opening of trading would not be inconsistent with the Act and the Commission’s regulations. Commission Regulation 1.38 explicitly requires open and competitive execution; however its language also makes clear that there is more than one means of open and competitive trading.
The Division believes that FutureCom would provide for competitive trading within the meaning of Regulation 1.38. FutureCom’s trade-matching algorithm would operate according to the same underlying theory of the trade-matching algorithm for the Globex trading system, the Project A trading system, and the NYMEX ACCESS system: trades would be conducted through a competitive auction process pursuant to an algorithm which would apply non-discretionary rules of priority, under which orders at the best prices would be executed first and under which new orders could obtain priority simply by bettering the current best bid or offer. FutureCom’s trade-matching rules would reward aggressive market behavior which is intended to add liquidity and foster participation by approved members in its markets.
FutureCom members would be able to execute exchanges of futures for physicals (“EFPs”) over the FutureCom trading system. FutureCom Bylaw 4.13 allows parties to execute EFPs at mutually agreed upon prices; provided, that: (1) at least one side of the transaction is priced within the daily price limits for the commodity; (2) both transaction parties are members of FutureCom; and (3) both parties have on deposit with the Exchange the necessary initial margin with respect to the futures portions of the EFP. All EFPs must be reported immediately to FutureCom which would make the appropriate adjustments to the parties’ open positions. FutureCom members would not be permitted to exceed their established position limits by entering into EFPs.
Consistent with Commission Regulation 1.35(a-2)(3), FutureCom Bylaw 4.4 requires that members provide documentation of cash transactions that underlie EFP transactions upon the Exchange’s request.51
FutureCom would integrate trading and clearing. All traders must be members of the Exchange and all members would be clearing members. Therefore, all traders on FutureCom would be self-clearing.
Each trader would be required to deposit margin in an account maintained by the Exchange at its settlement bank, the First National Bank of Amarillo, before an order would be accepted. Initial margins, submitted in cash or qualified securities,52 may be wired, mailed, or electronically transferred. Subsequent orders would require sufficient available margins in the trading account prior to the acceptance of the orders.
Initial margin for live cattle futures would be between $1,200 and $1,500 per contract. The precise level of initial margin would be established by FutureCom based upon each member’s trading level and creditworthiness.53
For each member, minimum maintenance margin would at all times be maintained at a level at least 1.5 times the daily price fluctuation. Maintenance marg