60870 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

1Affected 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 Commissiondesigned 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.

3Under 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.

contract market rules that have been made

effective under the Act. There will be a two

business day allowance at the beginning of

each calendar month for computation and

member notification purposes.

c. Affected Contract Market Month (Front

Month)

Front month means, for each affected

contract market, the month which is either

the expiration or delivery month which is

nearest to expiration or at the Exchange’s

discretion the expiration or delivery month

which is next nearest to expiration when the

contract month nearest to expiration is five

business days or less from the first notice day

or last trading day for cash settled contracts

for futures contracts or the expiration date for

futures options contracts. If a front month is

not subject to a prohibition pursuant

paragraph b. above, then it shall, nonetheless,

be an affected contract market month and be

subject to a prohibition unless, on the basis

of historical data, that front month

reasonably can be expected to have an

average daily trading volume of less than 500

contracts.

d. Exceptions

Dual trading shall be permitted under

exceptions consistent with Commission

Regulation 155.5(c)(4) in accordance with

Exchange rules which the Commission has

permitted to go into effect pursuant to

Section 5a(a)(12)(A) of the Act and

Regulation 1.41.

Notice of Intent To Condition and Proposed

Order Granting Conditional Dual Trading

Exemptions to the Chicago Board of Trade,

Supplemental Statement of Commissioner

John E. Tull, Jr.

I am happy to support the Commission’s

action proposing to grant the CBOT

conditional dual trading exemptions for its

affected markets. I am troubled, however, by

that part of the Commission’s Proposed Order

which orders the CBOT to conduct floor

surveillance daily on the open and close for

each affected market when such surveillance

is not required by the Act or the

Commission’s Regulations. Appendix A to

Regulation 155.5 states that such surveillance

should be conducted to the extent

practicable. In my opinion, the Commission

should not attempt to instruct an exchange

regarding the allocation of its resources with

such specificity. Such management decisions

are better left to the exchange leadership,

which has hands-on, daily contact with the

markets at issue. Management should have

the discretion to assign exchange personnel

as needed to monitor ‘‘hot’’ markets or pits

with trading activity of concern.

Opinion of Commissioner Barbara Pedersen

Holum, Concurring in Part and Dissenting in

Part, on the Disposition of the Chicago Board

of Trade’s Dual Trading Petition

For the reasons set out below, I concur

with the findings of the proposed Order but

I dissent from the proposed Order’s

imposition of a Commission-designed dual

trading restriction.

Section 4j(a)(3) of the Commodity

Exchange Act requires the Commission to

exempt a contract market conditionally from

the dual trading prohibition of Section 4j(a)

of the Act upon finding that: (1) There is a

substantial likelihood that a dual trading

suspension would harm the public interest in

hedging or price basing at the contract

market, and (2) other corrective actions are

sufficient and appropriate to bring the

contract market into compliance with the

standards of Section 5a(b) of the Act by

effectively detecting and deterring dual

trading-related abuses. The Commission has

determined that the Chicago Board of Trade’s

trade monitoring system fails to satisfy the

standards necessary for an unconditional

exemption, but that it meets the criteria for

granting a conditional exemption. In

addition, the Commission has determined to

impose a dual trading restriction on the CBT

a as condition to the exemption. Given these

findings, I agree with the majority’s view that

the CBT should be granted a conditional

exemption. However, I dissent from the

proposed Order because it would impose a

Commission-designed dual trading

restriction on the CBT as a condition to the

exemption.

Consistent with the statutory framework of

self-regulation, I believe that the CBT should

adopt its own rules to detect and deter dual

trading abuses. When the CBT’s trade

monitoring system as a whole is determined

by the Commission to meet the objectives of

the Act by detecting and deterring dual

trading abuses, the CBT would be granted an

unconditional exemption.

[FR Doc. 97–29893 Filed 11–12–97; 8:45 am]

BILLING CODE 6351–01–P

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.

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.1 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, 1997.2

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.3
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60871

4The 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.

5An imputed timing system does not capture the

actual trade execution time but derives a time from

other timing and trade data.

6Commission 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.’’

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 4 The

Commission further finds that CME’s

trade monitoring system includes audit

trail and recordkeeping systems that

satisfy the Act and regulations.

With regard to the S&P 500 futures

contract market, each required

component of CME’s trade monitoring

system, with the exception of oneminute 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 oneminute 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.5 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.

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 twominute 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 155.5.6 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’’).

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.

§ 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

CONSUMER PRODUCT SAFETY

COMMISSION

Sunshine Act Meeting

AGENCY: U.S. Consumer Product Safety

Commission, Washington, DC 20207.

TIME AND DATE: Friday, November 21,

1997, 10:00 a.m.

LOCATION: Room 410, East West Towers,

4330 East West Highway, Bethesda,

Maryland.

STATUS: Closed to the Public.

MATTER TO BE CONSIDERED:

Compliance Status Report

The staff will brief the Commission on

the status of various compliance

matters.

For a recorded message containing the

latest agenda information, call (301)

504–0709.

CONTACT PERSON FOR ADDITIONAL

INFORMATION: Sadye E. Dunn, Office of

the Secretary, 4330 East West Highway,

Bethesda, MD 20207, (301) 504–0800.

Dated: November 10, 1997.

Sadye E. Dunn,

Secretary.

[FR Doc. 97–30037 Filed 11–10–97; 2:38 pm]

BILLING CODE 6355–01–M