December 19, 2003

Ms. Jean A. Webb, Secretary

Commodity Futures Trading Commission

Three Lafayette Centre

1155 21st Street, N.W.

Washington, D.C. 20581

Re: [U.S. Futures Exchange, L.L.C. Application for Contract Market
Designation]{.underline}

Dear Ms. Webb:

The Board of Trade of the City of Chicago, Inc., appreciates the
Commission's reopening of the public comment period on the contract
market designation application of U.S. Futures Exchange, L.L.C. (Eurex
US). The Board of Trade agrees with the Commission that it is important
for interested members of the public and the industry to have a renewed
opportunity to comment.

The Board of Trade has filed two comment letters previously, one on
October 16 and one on December 9. We stand by the comments contained in
those letters. None of the major issues we have identified in those
letters has been resolved adequately, in our opinion. We will not,
however, repeat those issues in this letter. Instead, our focus will be
on new materials that have become available, and new issues have been
raised, in just the past 10 days. As we will show, the more the Eurex US
public record grows, the more that record illuminates new legal
deficiencies and public policy concerns arising out of the designation
application.

The Board of Trade takes very seriously its credibility and reputation
for institutional veracity. In a civil antitrust complaint filed against
the Board of Trade, Eurex US has charged that the Board of Trade has
misrepresented matters to the Commission in connection with its
consideration of the Eurex US application. That is not true. The Board
of Trade has been exercising and will continue to exercise its right to
petition the government, including the Commission, to raise legitimate
and appropriate issues for your consideration under the Commodity
Exchange Act. As always, if the Commission has any questions about any
of the issues we have raised or the factual basis for our statements, we
would be happy to discuss them. If Eurex US filed its law suit in order
to stop the Board of Trade from exercising its
constitutionally-protected rights, it will not succeed.

I. [Meaningful Comment Process]{.underline}.

By reopening the comment period, the Commission has underscored the
importance of the public comment process in the context of the Eurex US
application. The Board of Trade agrees completely with that sentiment.
We also believe, as explained in our October 16 comment letter, that any
agency providing an opportunity for public comment must make that
process meaningful by affording public access to relevant materials on
which the public may then comment. The Board of Trade is certain the
Commission agrees with that sentiment.

To date, however, the Board of Trade and other interested third parties
have been granted access to only a portion of the materials that Eurex
US has relied upon in support of its application. Of course, we
appreciate the Commission's interest in preserving the confidentiality
of truly sensitive business information. The Board of Trade itself has
invoked that rationale, from time to time, to protect the
confidentiality of its documents submitted to the Commission. In large
part, the Commission's decision whether to grant confidential treatment
to the Board of Trade or any other requesting party turns on the
Commission's acceptance of the credibility of the party requesting
confidential treatment.

The credibility of Eurex US on this score should be subject to
considerable doubt. On page 5 of the Eurex US letter dated November 18
(and also November 19 on internal pages), Eurex US explains why it will
not make available its contract specifications for public scrutiny:
"futures contract specifications are competitively sensitive and are
carefully safeguarded by all exchanges." That general statement is true
in many cases. In this case, however, it is most disingenuous. On the
Eurex US web-site today, in a document dated **November 13, 2003**,
Eurex US itself has disclosed to the world the specifications of its
proposed U.S. Treasury Security futures and options complex, the same
specfications it claims are "competitively sensitive." See
<http://www.eurexus.com/about/company_info/publications.html;http://www.eurexus.com/download/pdf/EurexUS_Products20045.pdf>.

Eurex US has not explained and could not explain how it could assert
that its contract specifications are entitled to confidential treatment
when it disclosed, presumably, those same specifications to the public
five days before its assertion of confidentiality. (Obviously there is
an additional and larger problem if the specifications submitted to the
CFTC and other U.S. regulators are not the same as the ones distributed
to the public on Eurex US's website.) The point is not just that the
contract specifications should be made public, but that the Commission
should revisit Eurex US's other claims of confidentiality to the extent
the Commission has relied on Eurex US's asserted business
confidentiality representations. It may well be that through this
renewed review the Commission may be able to include additional
materials in the public record, for further review and comment. That
process could make the Commission's review more informed and any future
public comment more meaningful.

II\. [Risks to Customers from Electronic Market
Fragmentation]{.underline}.

In prior submissions, the Board of Trade has expressed concern about
market fragmentation since, as the Eurex US web-site confirms, it
intends to trade futures contracts in the same U.S. Treasury Securities
as the Board of Trade. Given the realities of electronic trading today,
the Board of Trade has been concerned that problems in the Eurex US
market could spill-over to the Board of Trade's markets in the U.S.
Treasury Security complex. Eurex US and others have belittled those
concerns as merely theoretical and speculative.

Not so any more. As the Commission well knows, early this month NASDAQ
and Archipelago, which both offer electronic trading markets in the same
stock, experienced pricing irregularities in both markets due to a
computer glitch in one market. Each market then suspended trading in the
stock. Compounding that problem, one exchange decided to resume trading
in the stock before the other exchange in an effort to gain a
competitive advantage. The reported consequences of this episode
included busted trades and investor losses, reportedly in the many
millions of dollars. In the words of Senator Charles Schumer, quoted in
the Wall Street Journal on December 10, 2003, page 5, "When you don't
have a single, deep liquid market but instead competing exchanges, it
can create call kinds of problems. ... This is crying out for some
serious examination and proposals to prevent this sort of thing from
happening again in the future."

The Board of Trade agrees with Senator Schumer. The potential for market
disruptions generally does exist. Market fragmentation would even have
serious implications for the U.S. Treasury markets if it ends up causing
the futures markets' risk management service to be unavailable to
primary dealers and other institutions, whether it is for an hour or a
day. Market fragmentation also could lead to the transmission of
conflicting pricing signals or busted trades, resulting in losses to
major pension and mutual funds, as well as an erosion of public
confidence in our markets. Section 3(a) of the Commodity Exchange Act
recognizes that the futures markets "are affected with a national public
interest" including price discovery and price dissemination. We would
expect that the Commission would therefore be concerned about
designating any new exchange that would result in market fragmentation
that could harm these identified national public interests. The Eurex US
application squarely raises those concerns which we believe the
Commission would want to consider in light of the recent
NASDAQ-Archipelago experience.

The Commission also has testified that it has been in contact with the
Treasury Department about the Eurex US application. We do not know,
however, whether the Commission or the Treasury has been consulted on
the issues raised by Senator Schumer. We believe both the Commission and
the Treasury could analyze these issues, determine whether any possible
problems would exist and, if so, propose appropriate solutions before a
NASDAQ/Archipelago-type episode is replayed in the Treasury markets.
Indeed, the special review provisions Congress afforded to a proposal to
trade U.S. Treasury Security contracts could be a most appropriate
mechanism for initiating a review of these issues. See CEA
§ 2(a)(8)(B)(ii).

III\. [Competition Policy]{.underline}.

In the December 15 edition of Business Week, Professor Daniel G. Weaver
of Rutgers University wrote: " Eurex plans on obtaining the liquidity
Cantor and Brokertec failed to get by paying for order flow. This is not
competition but kickbacks to brokers and it should not be allowed." On
December 12, Bloomberg reported: "Eurex AG, the world's biggest futures
market, will offer free trading for a year to lure users to the U.S.
exchange it plans next year, a Eurex spokesman said." No one would
dispute that "kickbacks" and "luring users" with fee-free trading are
not the kind of "responsible innovation and fair competition among
boards of trade" Congress intended would foster the public interests in
futures trading. CEA § 3(b).

As Eurex US begins to reveal more of its strategy to, in its words,
"steal the liquidity" of other exchanges, the Commission's consideration
of, and determinations on, what constitutes fair competition become more
critical. The allegations of improper past Eurex conduct made in Dr.
Weaver's comment letter filed with the Commission only heighten the need
for this scrutiny. Whether in the context of the Commission's analysis
of the costs and benefits of designating Eurex US under Section 15(a) of
the CEA or its consideration of the "public interest to be protected by
the antitrust laws" under Section 15(b) of the CEA, we believe
Commission consideration of the following issues would be appropriate:

-   Is it fair competition for the largest exchange in the world to
    attempt to pay for order flow, directly or indirectly, to coerce
    market liquidity to shift to its new U.S. exchange?

-   Is it fair competition for the largest exchange in the world to
    charge new market users nothing for an extended period of time to
    trade and, apparently, to clear trades on the new U.S. exchange,
    even though that free trading and clearing is being offered below
    cost and in products both that Eurex does not now offer (U.S.
    Treasury products) and does offer now (the non- U.S. Treasury
    products) in which Eurex already holds a dominant market
    position?[^1]

-   Is it fair competition for the largest exchange in the world to dump
    its services and products in the United States at below cost in
    order to drive its U.S. competitors from the market?

Eurex US has not addressed these issues other than to deny that it will
pay for order flow and to assert that the CFTC need not inquire further.
These competition policy issues are serious with potentially
far-reaching ramifications. On this record, further Commission inquiry
and policy guidelines are warranted.

IV\. [The Call Around Market and Self-Regulation]{.underline}.

Options and complex futures trading strategies today are not
readily-tradeable on any electronic trading system. To have a liquid
trading market in these instruments, a non-electronic trading market
must be made available. The Board of Trade's market is its open auction
option trading pits. The Eurex option trading market today is the call
around market. That is where 90% of Eurex's current options trading
occurs.

The Board of Trade has pointed out that the Eurex US contract market
designation application does not in any way account for its capability
to self-regulate the call around market. The available materials on the
Eurex US application do not reveal that either Eurex US or its delegates
has the resources and expertise to police a far-flung telephone network
of dealing activity conducted under the auspices of the exchange. Eurex
US has **never**, in any of its submissions, disputed those
characterizations. Instead, its answer is to try to paper over this
serious hole in its self-regulatory program by claiming that Eurex US
will not have a call around market because all options trading will be
conducted electronically.

That may be its goal, but Eurex US cannot expect anyone seriously to
believe that with a flip of a switch Eurex has solved the technological
problem of electronic options trading. The truth is Eurex will
undoubtedly have to offer a stealth call around market operating on the
fringes of, or outside, its rules in order to offer significant options
trading. How will that conduct be regulated by Eurex US? Nothing in the
past or recent Eurex US record submissions even attempts to answer that
critical question.

In the absence of evidence that Eurex US could perform the required
self-regulatory functions for options trading, statutory standards
preclude Eurex US from offering options trading on its exchange. Only
products that are subject to rigorous self-regulation should be
permitted on a designated contract markets. The Eurex US application
fails that basic test.

V. [Block Trading Rules]{.underline}.

The amended Eurex US rules dealing with Block Trading raise numerous
issues. First, the amended rules "reserve" the minimum number of
contracts that could be traded in a Block Trade. The original rules had
provided specific numerical levels. Now those levels have been removed.
The minimum number of contracts is a vital element of any exchange's
block trading rules. If the minimum level is set too low, block trading
could overshadow the regular centralized trading market, rather than
provide a special, non-competitive execution alternative as the
Commission has always intended. A low minimum level also could easily
spawn a Eurex US call around market with its self-regulatory
deficiencies as described above. For at least that reason, Eurex US may
not be allowed to permit its members to engage in any block trading
until the Commission has reviewed and approved the specific exchange-set
minimum levels for permissible block trading.

Second, amended Rule 415(g) attempts to set the price parameters for any
block trade. As written, however, the price range for futures and
options refers to "daily" price ranges without specifying whether the
required range was yesterday's range, today's range (reflecting trading
thus far) or something else. Since block trades may be executed at any
time on Eurex US, it would be important to know what day's price range
is relevant for purposes of the pricing rules.

Third, the reporting process for an executed block trade seems to have
moved another step away from the traditional standard of open and
competitive trading. Rather than requiring a buyer to report
"immediately" a block trade, the new rule only calls on the buyer to
report "promptly." See Rule 415 (h). That extra reporting wiggle room
will increase the information advantage the buyer and seller would have
over all other market participants in terms of the trading ahead issue
discussed in our December 9 letter. In addition, after the parties have
confirmed the block trade, the exchange's reporting duties now require a
report to the counter-parties first and then the market as a whole
through the time and sales system. That process would seem to continue
to exacerbate the information disadvantage block trading creates rather
than ameliorate it. It is also not clear what type and quality of
disclosure are contemplated by the time and sales report.

The Eurex US block trading rules may be of extreme importance to the
operation of the planned new exchange in light of the technical
limitations on electronic trading in options and complex futures trading
strategies. These kinds of omissions, ambiguities and disparities are
not acceptable; these rules should be subject to further public scrutiny
when they are supplemented with the missing minimum contract levels or
changed again in the future.

IV\. [The Clearing Link: Current Business Plan and CFTC
Approval]{.underline}?

At the November 6 hearing before the House Agriculture Committee,
Chairman Newsome made two critical observations. First, he explained
that any new exchange seeking contract market designation must submit to
the Commission an application covering its current business plan.
Second, he said that the much publicized clearing link between Eurex
Clearing AG and The Clearing Corporation would require Commission
approval. Public statements by principals of both Eurex and TCC
contradict those Commission statements.

Eurex US has submitted its contract market designation application
without any mention of the clearing link it announced it would pursue in
an unambiguous series of statements in July, September, October,
November and even early December. Eurex US insists that the Commission
should consider its application as submitted without the clearing link,
but that it should still be free to market the clearing link as part of
its business plan. The Board of Trade and others have maintained that
since Eurex continues to market the clearing link as part of the new
exchange business plan, it must be included in the designation
application.

The Commission has previously indicated that it did not consider the
clearing link to be part of the Eurex US current business plan on the
theory that it was too speculative when the clearing link would be
finalized. It no longer is speculative, however. On December 16, 2003,
Eurex announced that the Global Clearing Link details had been
finalized; that the link "will launch" on March 28, 2004; and that at
that time "clearing customers will be able to carry at Eurex Clearing
USD-denominated products executed on Eurex US." In other words, the
Eurex plan for three months from now is to allow trades executed on
Eurex US to be cleared in Germany on Eurex Clearing, even though Eurex
Clearing is not a CFTC-registered derivatives clearing organization.

Is the Clearing Link part of the Eurex US "current business plan?" The
answer now must be "yes." Consider these headlines reflecting what the
media understands the current business plan to be:

-   "Eurex says global clearing link with start on March 28" (Reuters)

-   "Global clearing link to launch" (Financial Times)

-   "Global clearing link planned, Clearing Corp., Eurex say CFTC OK
    unnecessary" (Chicago Tribune)

-   "Eurex sets date for global clearing link" (Financial Times)

-   "Clearing Corp., Eurex Clearing Finalize Agreement to Create Common
    Service Link" (BNA Daily Report for Executives)

Perhaps most revealing is the headline from Bloomberg News: "Eurex
Delays Clearing Link in Bid for U.S. Market." The essence of that
headline and story is that Eurex intended originally to begin its
clearing link at the same time its new exchange would open but now would
defer the link for a mere two months. It is beyond debate that the
clearing link is now part of the Eurex US "current business plan" and
should be included in the pending designation application.

Both Eurex and TC also run afoul of the Commission's pronouncements on
the issue of CFTC approval of the clearing link. The CFTC has said the
link must be CFTC-approved. Eurex and TCC have said publicly that they
disagree. Eurex has stated it plans to consult with the Commission but
not to seek its approval. Presumably, Eurex will feel free to implement
the link without approval if it is granted DCM status. The most
straightforward way for the Commission to resolve this dispute is to
require Eurex US to include the clearing link in its designation
application. That result would allow the Commission to consider the
unique issues posed by the planned link and and make a decision based on
the application's merits, including the clearing link. Eurex US should
not be allowed to play the "bait and switch" game any longer. Now that
it has a finalized clearing link proposal, it should put that proposal
on the table, allow it to be properly scrutinized and let the Commission
apply the statutory standards to the proposal. Anything less would
trivialize the Commission's application process, compromise the public
interest and reward those who have gamed the system for many months.[^2]

[Conclusion]{.underline}

The Board of Trade thanks the Commission for this opportunity to comment
on the continuing deficiencies in the Eurex US application. At best,
that application is materially incomplete and the Commission should
suspend its consideration until a complete application is filed. CEA
§ 6(a). If the application is considered to be complete, however, we
urge the Commission to exercise its power to refuse to designate Eurex
US due to its failure to meet the statutory standards for a designated
contract market.

Sincerely,

Bernard W. Dan

[^1]: Whether the Eurex US fee-free trading offer extends to clearing is
    unclear. Surely if it does, the Commission would need to consider on
    what basis The Clearing Corporation can legitimately offer free
    clearing services, whether doing so jeopardizes the safety and
    soundness of TCC and what the ramifications would be if Eurex
    actually extended the concept of payment for order flow to payment
    for clearing services?

[^2]: The Board of Trade notes that the Commission has adopted the view
    that it is not considered to be in possession of materials
    supporting an application when the applicant chooses merely to show
    the materials to Commission staff at the office of the applicant's
    counsel. This issue has arisen in the context of the Commission's
    "non-possession" of the Eurex US clearing agreement. If that
    practice is followed by others, of course, the Commission might
    never have any relevant materials submitted by third parties that it
    would be required to disclose to the public. In any event, in the
    specific context of the clearing link especially, the Board of Trade
    believes the Commission should obtain and retain in its possession
    all relevant documents, make public as much material as it can and
    allow full public comment on the cross-border and other issues the
    link would raise. Those materials should not be allowed to be
    quarantined from public scrutiny through the artifice of keeping the
    documents only in Eurex counsel's office.