[Federal Register Volume 62, Number 219 (Thursday, November 13, 1997)]
[Notices]
[Pages 60870-60871]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-29894]


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COMMODITY FUTURES TRADING COMMISSION


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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

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

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

SUPPLEMENTARY INFORMATION: On October 20, 1993, CME submitted a 
Petition for Exemption from the Dual Trading Prohibition contained in 
Section 4j of the Commodity Exchange Act (``Act'') and Regulation 155.5 
for its affected contract markets, including the S&P 500 futures 
contract market.<SUP>1</SUP> The Exchange corrected that petition on 
December 1, 1993. Subsequently, the Exchange amended its petition on 
January 21, 1994. CME updated its petition on January 21, 1997. Notice 
of the public availability of the CME's updated exemption petition was 
published in the Federal Register on February 20, 1997.<SUP>2</SUP>
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    \1\ Affected contract market means a contract market with an 
average daily volume equal to or in excess of 8,000 contracts for 
each of four quarters during the most recent volume year. Commission 
Regulation 155.5(a)(9). See Section 4j(a)(4). The Commission is 
granting CME conditional exemptions from the dual trading 
prohibition for its remaining seven affected contract markets. A 
Notice of Intent to Condition and proposed Order granting such 
conditional exemptions is being submitted for publication together 
with this Order.
    \2\ 62 FR 7755 (February 20, 1997). The Commission did not 
address the Exchange's dual trading exemption petition in 1994 in 
large part because of the Exchange's prior representation that it 
intended to automate the entry of trade execution times by 
developing a handheld electronic trading terminal. In June 1994, the 
Commission was informed that the proposed handheld terminal would 
not be in place by the October 1995 deadline for compliance with the 
heightened audit trail standards set forth in Section 5a(b)(3) of 
the Act. Because CME had not sufficiently demonstrated that its 
existing audit trail system met current and future standards, the 
Commission required the Exchange to demonstrate its ability to meet 
the audit trail requirements using Commission-designed tests and, 
thus, deferred consideration of the Exchange's petition. Subsequent 
to evaluating the results of the tests, the Commission offered CME 
the opportunity to supplement its petition.
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    Upon consideration of CME's petition, as supplemented, and other 
data and analysis, including, but not limited to:
    Exchange audit trail test results reconciling imputed times to 
underlying trade documentation and verifying data on ``window sizes''; 
actions taken in response to the Commission's November 1994 Report to 
Congress on Futures Exchange Audit Trails, June 1995 Report on Audit 
Trail Accuracy and Sequencing Tests (``Audit Trail Report''), and 
August 12, 1996 Report on Audit Trail Status and Re-Test (``Audit Trail 
Re-Test Report''); Commission trade practice investigations and 
compliance reviews conducted in conjunction with rule enforcement 
reviews or other investigatory or surveillance activities.
    The Exchange's S&P 500 futures contract trading 
restrictions.<SUP>3</SUP>
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    \3\ Under CME Rule 541 (S&P 500 Top Step rule), a member cannot 
trade an S&P futures contract for his or her own account while on 
the top step of the S&P 500 futures pit, except to liquidate a 
position that resulted from an error. Further, a member who has 
executed a customer order for an S&P 500 futures contract while on 
the top step of the S&P 500 futures pit may not on the same day 
trade such contracts for his or her own account.

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[[Page 60871]]

    The Division of Trading and Markets Memorandum dated October 28, 
1997; and upon review of each element of CME'S trade monitoring system 
and of CME's trade monitoring system as a whole, the Commission hereby 
finds that CME meets the standards for granting a dual trading 
exemption contained in Section 4j(a) of the Act as interpreted in 
Regulation 155.5 for its S&P 500 futures contract market.
    Subject to CME's continuing ability to demonstrate that it meets 
applicable requirements, the Commission specifically finds with respect 
to the S&P 500 futures contract market that CME maintains a trade 
monitoring system which is capable of detecting and deterring, and is 
used on a regular basis to detect and to deter, all types of violations 
attributable to dual trading and, to the full extent feasible, other 
violations involving the making of trades and execution of customer 
orders, as required by Section 5a(b) of the Act and Regulation 155.5.2 
<SUP>4</SUP> The Commission further finds that CME's trade monitoring 
system includes audit trail and recordkeeping systems that satisfy the 
Act and regulations.
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    \4\ The Commission considers CME Rule 541 to be an integral part 
of the Exchange's trade monitoring system. In the event of any 
material change in such system, the Commission may revisit its 
determination to grant this exemption for the S&P 500 futures 
contract.
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    With regard to the S&P 500 futures contract market, each required 
component of CME's trade monitoring system, with the exception of one-
minute execution time accuracy, is described in the Commission's Notice 
of Intent to Condition and proposed Order being submitted for 
publication together with this Order. With respect to one-minute 
execution time accuracy, the Commission finds as follows:
One-Minute Execution Time Accuracy
    CME's Regulatory Trade Timing system (``RTT'') imputes an execution 
time for every trade.<SUP>5</SUP> Trade times are imputed based upon 
entry and exit timestamps on order tickets; time and sales reports; 
times that the trades were submitted for clearing; trading card numbers 
and sequence of trades on trading cards; 15-minute bracket codes; 
manual execution times for certain types of trades; calculated 
differentials for spread trades; identification of spread legs and 
types of spread trades; and available times resulting from electronic 
order entry or trading systems, if any.
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    \5\ An imputed timing system does not capture the actual trade 
execution time but derives a time from other timing and trade data.
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    The Commission has made clear that a ``reliably accurate'' imputed 
trade execution time can be demonstrated only by a timing window that 
narrows the time assigned to the trade to a two-minute period within 
which the trade is most likely to have occurred. For the S&P 500 
futures contract, CME's audit trail system records reliably accurate 
trade times in increments of no more than one minute in length as 
required by Section 5a(b)(2) of the Act, Regulation 1.35(g), and 
Appendix A to Regulation 155.5.<SUP>6</SUP> Specifically, the Exchange 
has established for the S&P 500 futures contract market that 90 percent 
or more of imputed trade times, as assigned by RTT, are reliable, 
precise, and verifiable as demonstrated by being imputed within a 
timing window of two minutes or less (``90 percent performance 
standard'').
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    \6\ Commission Regulation 1.35(g) requires that ``[a]ctual times 
of execution shall be stated in increments of no more than one 
minute in length.'' Section 5a(b)(2) of the Act, among other things, 
codified that timing requirement by stating that an exchange's audit 
trail system shall, ``consistent with Commission regulation, 
accurately record the times of trades in increments of no more than 
one minute in length.'' Section II of Appendix A to Commission 
Regulation 155.5 requires that a contract market, in describing its 
audit trail system in a petition for exemption from the dual trading 
prohibition, ``[d]emonstrate the highest degree of accuracy 
practicable (but in no event less than 90% accuracy) of trade 
execution times required under regulation 1.35(g) (within one 
minute, plus or minus, of execution) * * *. ..'' In addition, the 
contract market must ``[d]emonstrate the effective integration of 
such trade timing data into the contract market's surveillance 
system with respect to dual trading-related abuses.'' For contract 
markets that impute trade execution times, Appendix A requires that 
the contract market provide a description of the trade imputation 
algorithm, ``including how and why it reliably establishes the 
accuracy of the imputed trade execution times.''
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    In order to demonstrate attainment of the 90 percent performance 
standard, the Exchange has provided windows data for the S&P 500 
futures contract market in response to Commission requests. For both 
December 10, 1996, and March 12, 1997, the percentage of trades with 
timing windows of two minutes or less was 90 percent. On June 30, 1997, 
the Exchange provided windows data for three specific trade dates 
selected by the Commission using a random sampling method. The windows 
data revealed that the percentage of trades with timing windows of two 
minutes or less was 91 percent on May 28, 1997, and June 5, 1997, and 
92 percent on June 10, 1997. Thus, the Exchange has demonstrated 
consistent compliance with the 90 percent performance standard for the 
S&P 500 futures contract.
    Accordingly, on this date, the Commission HEREBY GRANTS CME's 
Petition for Exemption from the dual trading prohibition for trading in 
its S&P 500 futures contract.
    For this exemption to remain in effect, CME must demonstrate on a 
continuing basis that it meets the relevant statutory and regulatory 
requirements. The Commission will monitor continued compliance through 
its rule enforcement review program and any other information it may 
obtain about CME's program.
    Unless otherwise specified, the provisions of this Order shall be 
effective on the date on which it is issued and shall remain in effect 
unless and until it is revoked in accordance with Section 8e(b)(3)(B) 
of the Commodity Exchange Act, 7 U.S.C. Sec. 12e(b)(3)(B).
    It is so ordered.

    Dated: November 7, 1997.
Edward W. Colbert,
Deputy Secretary to the Commission.
[FR Doc. 97-29894 Filed 11-12-97; 8:45 am]
BILLING CODE 6351-01-P