[Federal Register: October 7, 1999 (Volume 64, Number 194)]
[Notices]
[Page 54620-54621]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr07oc99-43]

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COMMODITY FUTURES TRADING COMMISSION


Cantor Financial Futures Exchange's Proposal To Adopt Block
Trading Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed new rules and rule amendments of the Cantor
Financial Futures Exchange to establish block trading procedures and
request for comment.

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SUMMARY: The New York Board of Trade, on behalf of the Cantor Financial
Futures Exchange, Inc. (``CX'' or ``Exchange''), has submitted proposed
new rules and rule amendments to the Commission that would establish
block trading procedures at CX. Under these procedures, qualified
market participants would be allowed to negotiate and arrange futures
transactions of a minimum size bilaterally away from the centralized,
competitive market. Once the specific terms of the block transaction
had been agreed to, the counterparties would report the relevant
details of the transaction to the Exchange for clearing and settlement.
CX's proposal is the first contract market proposal that the Commission
has received that would allow block trading.
    Acting pursuant to the authority delegated by Commission Regulation
140.96(b), the Division of Trading and Markets (``Division'') has
determined to publish CX's proposal for public comment. The Division
believes that publication of the proposal is in the public interest and
will assist the Commission in considering the views of interested
persons.

DATES: Comments must be received on or before October 22, 1999.

ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
Street, NW, Washington, DC 20581. Comments also may be sent by
facsimile to (202) 418-5221 or by electronic mail to
[email protected] Reference should be made to the ``Cantor Financial
Future Exchange's Proposal to Adopt Block Trading Procedures.''

FOR FURTHER INFORMATION CONTACT:
David P. Van Wagner, Associate Director, Division of Trading and
Markets, Commodity Futures Trading Commission, Three Lafayette Centre,
1155 21st Street, NW, Washington, DC 20581. Telephone (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

    On June 4, 1999, the Commodity Futures Trading Commission issued an
Advisory on Alternative Execution, or Block Trading, Procedures for the
Futures Industry.\1\ Through this Advisory, the Commission announced
its intention to consider contract market proposals to adopt
alternative execution, or block trading, procedures for large size or
other types of orders on a case-by-case basis under a flexible approach
to the requirements of the Commodity Exchange Act (``Act'') and the
Commission's regulations. Under this approach, each contract market
retains the discretion to permit alternative execution procedures and
has the ability to develop procedures that reflect the particular
characteristics and needs of its individual markets and market
participants.
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    \1\ 64 FR 31195 (June 10, 1999); 64 FR 34851 (corrections). The
Commission first raised the subject of alternative execution, or
block trading, procedures in its Concept Release on the Regulation
of Noncompetitive Transactions Executed on or Subject to the Rules
of a Contract Market. 63 FR 3708 (January 26, 1998). Through the
Concept Release, the Commission wished to explore whether certain
alternative execution procedures for large size or other types of
orders could be developed to satisfy the needs of market
participants while furthering the policies and purposes of the
Commodity Exchange Act and the Commission's Regulations.
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    After the issuance of the Advisory, the New York Board of Trade, on
behalf of CX, submitted proposed new CX Rules 4-A and 305-A and
proposed amendments to CX Rules 300, 302, and 306 to the Commission
pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulation
1.41(c).\2\ The proposed new rules and rule amendments would establish
block trading procedures at CX. Under these procedures, qualified
market participants would be allowed to negotiate and arrange futures
transactions of a minimum size bilaterally away from the centralized,
competitive market. Once the specific terms of the block transaction
had been agreed to, the counterparties would report the relevant
details of the transaction to CX for clearing and settlement. Thus,
under the proposed procedures, certain futures transactions could be
executed noncompetitively rather than through CX's electronic order-
matching system.
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    \2\ See Letter from Ms. Audrey R. Hirschfeld, Senior Vice
President and General Counsel, New York Board of Trade to Ms. Jean
A. Webb, Secretary, Commodity Futures Trading Commission, dated
September 15, 1999.
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II. Description of the Proposed Block Trading Procedures

A. Eligible Contracts and Market Participants

    Under the proposed procedures, block trading would be permitted in
any contract that has been designated by CX for such purpose. CX is
seeking to permit block trading in those contracts for which it has
been designated as a contract market by the Commission.\3\ CX's
proposal also would restrict block trading to those market participants
that qualify as an ``eligible participant'' as that term is defined by
Commission Regulation 36.1(c)(2). However, a commodity trading advisor
registered under Act (including without limitation any investment
advisor registered as such with the Securities and Exchange Commission
that is exempt from regulation under the Act or the Commission's
regulations) with total assets under management exceeding $50 million
may enter into block

[[Page 54621]]

transactions on behalf of customers without these customers having to
qualify as ``eligible participants'' under Commission Regulation
36.1(c)(2).
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    \3\ Such contracts include: (1) U.S. Treasury Bond futures; (2)
U.S. Treasury Ten-Year Note futures; (3) U.S. Treasury Five-Year
Note futures; and (4) U.S. Treasury Two-Year Note futures.
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    A ``Clearing Member,'' ``Screen Based Trader,'' or ``Foreign Screen
Based Trader,'' as these terms are defined in CX's rules, would be able
to enter into block transactions either on a proprietary basis or, if
otherwise permitted, on behalf of customers or other third parties.
These entities (or any of their affiliates) would be eligible to
execute block transactions on a proprietary basis only if they were
``Primary Market Makers'' in the relevant contract market.\4\ In
addition, only Primary Market Makers would be allowed to make markets
in block trades. Block transactions executed directly between two
Primary Market Makers, or between a Primary Market Maker represented by
an agent and another Primary Market Maker would be prohibited.
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    \4\ In connection with its block trading procedures, CX would
create a new class of market makers called ``Primary Market
Makers.'' Subject to the terms and conditions of the market making
agreement entered into the CX, a Primary Market Maker would be
obligated to make markets in the underlying contract market
throughout the trading session except for short intervals.
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B. Size and Price Requirements

    Each buy or sell order underlying a block trade must authorize its
execution through CX's proposed block trading procedures and must be
for at least 50 contracts.\5\ This minimum size requirement would
increase once the average monthly trading volume on CX with respect to
the relevant contract reached certain thresholds for three consecutive
months. Specifically,the minimum size would increase to 75, 100, 200,
and 250 contracts once the average monthly trading volume on CX
exceeded 25,000, 50,000, 100,000, and 150,000 contracts, respectively,
for three consecutive months with respect to the relevant contract.\6\
The price of a block trade must be ``fair and reasonable'' in light of:
(1) The size of such block trade; and (2) the price and size of other
trades in the same contract at the relevant time.
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    \5\ Generally, under CX's proposed block trading procedures,
orders from different accounts may not be aggregated to satisfy the
minimum size requirement. However, a commodity trading advisor
registered under the Act (including without limitation any
investment advisor registered as such with the Securities and
Exchange Commission that is exempt from regulation under the Act of
the Commission's regulations) with total assets under management
exceeding $50 million may aggregate orders from different accounts
to satisfy the minimum size requirement.
    \6\ Since the inception of CX trading in September 1998, none of
CX's four Treasury securities futures contracts have ever averaged a
monthly trading volume in excess of 25,000 contracts. In the three-
month period from June to August 1999, CX's Treasury bond futures
contract, the Exchange's highest volume contract, had an average
monthly trading volume of 15,383 contracts.
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C. Transparency

    Each block trade executed in accordance with CX's proposed block
trading procedures must be cleared through Clearing Members of the
Exchange. Information identifying the relevant contract, contract
month, price, quantity, time of execution and counterparty Clearing
Member for each block trade must be reported to CX within ten minutes
immediately following its execution. In the case of a block trade that
is executed during the last ten minutes of the trading session on any
given day or after the trading session has closed, the details of such
a block trade must be reported to CX prior to the opening of business
on the next succeeding day. CX will publicize information identifying
the relevant contract, contract month, price and quantity for each
block trade promptly after such information has been reported to CX.

III. Request for Comment

    The Commission requests comment from interested persons concerning
any aspect of CX's proposed block trading procedures.
    Copies of CX's proposed new rules and rule amendments and related
materials are available for inspection at the Office of the
Secretariat, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW., Washington, DC. 20581. Copies also may be
obtained through the Office of the Secretariat at the above address or
by telephoning (202) 418-5100.

    Issued in Washington, DC, on September 30, 1999.
Alan L. Seifert,
Deputy Director.
[FR Doc. 99-26121 Filed 10-6-99; 8:45 am]
BILLING CODE 6351-01-M


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