60860 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

1The Commission is granting CME an

unconditional exemption from the dual trading

prohibition for its S&P 500 futures contract. An

Order granting such exemption is being submitted

for publication together with this Notice.

2The Commission has previously discussed in

several instances, including its November 28, 1994

Report to Congress on Futures Exchange Audit

Trails, the possible abuses attendant to dual trading.

See also the Commission’s Proposed Regulation

Prohibiting Dual Trading by Floor Brokers, 56 FR

13025 (March 9, 1993).

3Affected 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) of the

Act. As noted by the Commission in promulgating

Regulation 155.5, a contract market trading on an

exchange floor will be considered separate from a

contract market in the same commodity trading a

screen-based trading system. The Commission

further stated that, while not excluding electronic

trading from the dual trading prohibition, the

Commission was retaining the flexibility to

consider the matter further. See 58 FR 40335 (July

28, 1993). The Commission is not addressing

screen-based trading in this proposed Order.

Two contract markets included in the original

petition, British Pound futures and options on

Deutsche Mark futures, no longer are affected

contract markets as defined in the Act and

regulations. This proposed Order is not applicable

to those two contract markets. As previously noted,

this proposed Order also is not applicable to the

S&P 500 futures contract market.

4 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.

which reads, ‘‘The net worth of a firm regular

to deliver corn or soybeans must be greater

than or equal to $40,000,000.’’

The Commission has determined that

publication of the Order will provide

notice to interested members of the

public of its action, is consistent with

the Commodity Exchange Act and is in

the public interest.

Issued in Washington, D.C., this 7th day of

November 1997, by the Commodity Futures

Trading Commission.

Edward W. Colbert,

Deputy Secretary of the Commission.

[FR Doc. 97–29895 Filed 11–12–97; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

Chicago Mercantile Exchange Petition

for Exemptions 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: Notice of intent to condition

and proposed order granting conditional

exemptions from the prohibition on

dual trading in seven affected contract

markets.

SUMMARY: For the reasons set forth in

the Proposed Order Granting

Conditional Dual Trading Exemptions

(‘‘proposed Order’’), the Commodity

Futures Trading Commission

(‘‘Commission’’) intends to grant,

subject to a stated condition, the

petition of the Chicago Mercantile

Exchange (‘‘CME’’ or ‘‘Exchange’’) for

exemptions from the dual trading

prohibition in Section 4j(a) of the

Commodity Exchange Act (‘‘Act’’) and

Commission Regulation 155.5 for its

Live Cattle, Deutsche Mark, Japanese

Yen, Swiss Franc and Eurodollar futures

contracts and the option contracts on

Eurodollar and S&P 500 futures.1

Pursuant to the Act and Commission

Regulation 155.5(d)(8)(C)(iii), CME may

submit written supplemental data,

views or arguments and will have the

opportunity to make an oral

presentation to the Commission before

the Commission makes its final

determination.

DATES: If CME intends to make an oral

presentation, it must submit its request

in writing no later than ten days after

receipt of this proposed Order. CME

must submit any written supplemental

data, views or arguments within 30 days

of receipt of this proposed Order.

ADDRESSES: CME’s requests for oral

presentation and submission of written

supplements are to be sent to the Office

of the Secretariat, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street, N.W.,

Washington, D.C. 20581.

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 Street, N.W., Washington,

D.C. 20581; telephone: (202) 418–5490.

SUPPLEMENTARY INFORMATION: A floor

broker engages in dual trading when he

or she executes a customer’s order

during the same trading session in

which he or she executes, directly or

indirectly, a trade in the same contract

for his or her own account or an account

in which he or she has an interest. Dual

trading can afford floor brokers the

opportunity to abuse customer orders if

audit trail information and surveillance

are insufficient to permit the detection

of such abuses. Specifically, a dual

trading floor broker can directly commit

abuses of customer orders such as

trading ahead or against those orders

and also has an informational advantage

for his or her personal trading.2 Section

4j(a) of the Act and Regulation 155.5

prohibit dual trading and establish trade

monitoring standards that must be met

in order for contract markets to be

exempted from the prohibition.

The Commission intends to issue the

following proposed Order granting CME

conditional dual trading exemptions

pursuant to Section 4j(a) of the Act and

Commission Regulation 155.5. In

accordance with Regulation 155.5(d)(8),

CME may submit to the Commission in

writing any supplemental data, views or

arguments within 30 days of receipt of

this Notice and proposed Order. In

addition, CME may request, in writing

within ten days of receipt of this Notice

and proposed Order, an opportunity to

make an oral presentation to the

Commission. If CME submits a request

for an oral presentation, the Exchange

will be notified by the Commission of

the date and the terms under which

CME may make such presentation.

Public notice of such an oral

presentation also will be provided in

accordance with the requirements of the

Government in the Sunshine Act, 5

U.S.C. 552b (Supp. I 1995).

Proposed Order Granting Conditional

Dual Trading Exemptions

On October 20, 1993, CME submitted

a Petition for Exemption from the Dual

Trading Prohibition contained in

Section 4j of the Act and Commission

Regulation 155.5 in CME’s Live Cattle,

Deutsche Mark, Japanese Yen, Swiss

Franc, British Pound, Eurodollar and

S&P 500 futures contracts and the

option contracts on the Deutsche Mark,

Eurodollar and S&P 500 futures. 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, with

respect to eight affected contract

markets.3 Notice of the public

availability of the CME’s updated

exemption petition was published in the

Federal Register on February 20, 1997.4

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
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60861

5A list of the specific documents considered in

connection with this proposed Order will be made

available to the Exchange upon request. Copies of

any documents not originally furnished by CME

also will be made available upon request.

6Under CME Rule 552, adopted in 1991, dual

trading is, with certain exceptions, prohibited in

any contract month which is mature and liquid, i.e.,

a contract month by position in relation to the front

month contract at any given point in time that has

had during the prior six calendar months an average

daily pit-traded volume of 10,000 or more contracts.

In any such contract months, members may trade

only for their personal accounts until they have

executed a customer order and then may no longer

execute personal trades in that contract month

during that trading session. Under CME Rule 555,

effective July 1993, a member may not, with certain

exceptions, while standing on the top step, execute

a trade or place an order for his personal account

in any contract months subject to the CME Rule 552

dual trading restriction which are traded in the

contract month where the member stands.

7Commission 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 tradingrelated 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.’’

8An imputed timing system does not capture the

actual trade execution time but derives a time from

other timing and trade data.

9To the extent that the time imputed by a

computer algorithm was consistent with required

trade documentation, time and sequence data and

time and sales information for the subject trade and

surrounding trades, that time was deemed accurate.

If that imputed time fell within a two-minute level

of precision as measured by the size of the final

time window determined by such algorithm, that

imputed time was considered to be verifiable,

reliable and precise. Thus, the Commission stated

in its Audit Trail Report, ‘‘[a]lthough 90 percent of

CME trade times satisfied the standards [of

consistency with underlying data] for Test I,

available data do not permit sufficiently precise

Continued

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 ReTest Report’’);

Commission trade practice

investigations and compliance

reviews conducted in conjunction

with rule enforcement reviews or

other investigatory or surveillance

activities;5

the Exchange’s existing dual trading and

top step trading restrictions; 6

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 finds that the

Exchange’s trade monitoring system

does not fully satisfy the requirements

of Sections 5a(b) and 4j(a)(3) of the Act

and Regulation 155.5 in that the audit

trail component is deficient. The

Commission finds that corrective

actions are sufficient and appropriate to

meet those standards. In addition, the

Commission finds that, based on an

analysis of the composition of trading

(by transaction size and volume) of

certain distant contract expirations and

option markets, there is a substantial

likelihood that the broad scope of the

dual trading prohibition specified under

Section 4j of the Act and Regulation

155.5, which applies to a contract

market as a whole, would harm the

public interest in hedging or price

basing in less liquid months of the

affected contract markets. Therefore, the

Commission has determined to grant

CME conditional exemptions from the

dual trading prohibition of Section 4j of

the Act and Regulation 155.5 in the

seven affected contract markets.

The Commission is granting the

Exchange’s petition subject to the

Exchange taking the corrective action

specified below and implementing and

enforcing the dual trading restriction

described in the Appendix to this

proposed Order. The Commission has

concluded that the proposed dual

trading restriction, which imposes a

prohibition on dual trading in actively

traded months but has no impact on less

actively traded back months, is

appropriate as a method to deter dual

trading-related abuses and other

customer abuses. The Commission’s

limited restriction, as opposed to the

statutory dual trading ban, strikes a

balance between the need to preserve

liquidity in certain low volume months

and the need to protect customers from

the potential abuses that are associated

with dual trading.

The Commission Hereby finds as

follows:

Components of Exchange’s Trade

Monitoring System

Audit Trail System

One-Minute Execution Time Accuracy

The Exchange’s audit trail system fails

to record ‘‘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 155.5.7

Specifically, the Exchange has not

established for the seven affected

contract markets that 90 percent or more

of imputed trade times, as assigned by

the Exchange’s trade timing system, are

reliable, precise, and verifiable as

demonstrated by being imputed within

a timing window of two minutes or less

(‘‘90 percent performance standard’’).

Thus, an impermissible amount of trade

timing data, an integral part of an

exchange’s trade monitoring system, is

not reliably accurate in accordance with

that standard and thus negatively

impacts the Exchange’s surveillance

systems and investigatory and

disciplinary action programs.

The Commission has made clear that

a reliably accurate imputed trade

execution time only can be

demonstrated 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. Even where an exchange can

demonstrate a trade timing window of

two minutes or less, it is not possible to

determine where within that window,

the trade occurred. This underscores the

critical need for compliance with the 90

percent performance standard.

CME’s Regulatory Trade Timing

System (‘‘RTT’’) imputes an execution

time for every trade.8 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 any available times resulting from

electronic order entry or trading

systems. Based on these data, RTT

determines various time spans within

which a trade is likely to have been

executed and ultimately assigns an

imputed execution time for the trade.

The audit trail tests designed and

reviewed by the Commission and

conducted by the Exchange in response

to a November 23, 1994 Commission

letter involved a determination of the

consistency of imputed trade execution

times with all underlying audit trail

records and data. Based upon that

process, trade timing accuracy and

sequencing rates for CME’s imputed

system were computed.9 In reviewing
60862 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

verification of the accuracy of all of these trade

times.’’ Audit Trail Report at 11.

Under the 90 percent performance standard, only

trade times assigned by the Exchange’s imputed

timing system within timing windows of two

minutes or less are reliably accurate. As noted

above, Commission staff deems accurate those

trades for which the imputed trade times are

consistent with all underlying audit trail records

and data, as determined by manual review. When

comparing windows data for accurate trades and all

trades, the Division has found that a higher

percentage of accurate trades are assigned imputed

times that fall within windows of two minutes or

less and thus meet the 90 percent performance

standard. However, the resulting percentage

difference between accurate and all trades generally

has not exceeded one percent. In addition, since the

use of all trades data facilitates exchange

submission of timing windows percentages because

such data do not have to be generated in

conjunction with an accuracy test, which requires

an analysis of extensive trade documentation, the

Commission finds that the use of all trades data

provides an acceptable basis for determining

windows performance.

10 In response to recommendations made in the

Audit Trail Report, the Exchange modified its

trading card procedures such that only six trades

can be recorded on a card, trade data can be entered

only on one side of the card, and a new card must

be used with the change of each time bracket. The

Exchange modified its reporting and enforcement

procedures to supply members more promptly with

information on audit trail inconsistencies and to

require corrections that reflect actual events, to

enforce more aggressively data recordation and

submission requirements, including spread quote

reporting and timing data, and to enforce more

aggressively timestamping procedures for flashed

orders.

The Exchange also made a number of

improvements to its trade timing system. Since

1995, the CME has required a trade submission

indicator for executions of orders flashed upon

receipt, used seconds in the imputed timing system,

including seconds from order ticket timestamps,

added exit timestamps to the imputed timing

system, used order type information to time trades,

and used the clearing receipt time in its timing

system. The Exchange also made a number of

programming improvements to its timing algorithm.

CME declined to implement two Commission

recommendations: that members record and use

manual execution times for at least the first and

sixth trades on trading cards and that the Exchange

synchronize timestamp clocks across the floor and

upgrade the clocks to record times to the second.

11The windows data percentages indicated for the

trade dates December 10, 1996, through June 10,

1997, do not include windows data for the S&P

futures contract market. As noted above, the

Commission is issuing a separate order granting

CME an unconditional dual trading exemption for

the S&P 500 futures contract market.

The Exchange submitted data indicating that 90

percent or more of the imputed trade times in its

S&P 500 futures contract had timing windows of

two minutes or less on all three dates selected by

Commission staff using a random sampling method,

as well as two prior dates selected by the Exchange

based upon Commission timeframes. The

Commission believes that, while timing windows

data for all dates provided should be considered,

the dates selected randomly by persons other than

those affiliated with the Exchange should be

accorded greater weight in determining whether an

affected contract market attains the 90 percent

performance standard. The windows data for the

S&P 500 futures contract market demonstrates

consistent compliance with the 90 percent

performance standard. None of the Exchange’s other

affected contract markets demonstrated consistent

compliance.

12Notably, although there are differences in

various systems among the exchanges, the three

other exchanges for which the Commission has

granted unconditional exemptions from the dual

trading prohibition require that customer and

personal trades be recorded sequentially on a single

trading document. Similar to CME, one of those

exchanges, the Coffee, Sugar and Cocoa Exchange,

Inc., also uses an imputed timing system to assign

trade execution times. Such sequencing also can be

achieved by recording personal and customer trades

in sequence on one set of sequentially numbered

trading documents. As the Commission noted in

discussing the results of CME’s first audit trail test,

‘‘recordation of a member’s personal and customer

trades in sequence should be the Exchange’s

objective.’’ Audit Trail Report at 14–15. Section

5a(b)(3) of the Act provides, among other things,

that an exchange’s audit trail system must record

accurately and promptly essential data on all trades,

including execution time, through a means that is

adequately precise to determine the sequence of

customer and personal trades, to the extent

practicable as determined by the Commission by

rule or order.

13See Audit Trail Re-Test Report at 39.

14The Commission requires retention of a record

of any cancellations, changes, or corrections to

trades. Commission Regulation 1.35(d) and the

Outtrade Interpretation, 54 FR 37004 (September 6,

1989). The Commission amended Regulation

1.35(d)(7), effective October 21, 1996, to require that

the correction of erroneous information on trading

records be accomplished in such a manner that the

originally recorded information must not be

obliterated or otherwise made illegible. 61 FR 42999

(August 20, 1996). In November 1996, CME

amended its CME Rule 536 to comport with the

Commission’s amendment to Regulation 1.35(d)(7).

the results of the test designed to

evaluate trade timing accuracy,

Commission staff determined that,

although 90.4 percent of CME’s trade

times satisfied the standard for

consistency with the underlying data,

only 72 percent of those trade times had

timing windows of two minutes or less

and thus could be verified.10 In March

1996, the Commission conducted a retest of CME’s audit trail system.

Although 94.2 percent of CME’s trades

times satisfied the standard for

consistency with the underlying data,

only 79.5 percent of those trade times

had timing windows of two minutes or

less and thus could be verified.

Subsequent to the re-test, the

Exchange provided windows data for all

affected contract markets (including the

S&P 500 futures market) in response to

Commission requests. For December 10,

1996, the overall percentage of trades

with timing windows of two minutes or

less was 82 percent. The percentage of

trades with timing windows of two

minutes or less computed separately for

each of the seven affected contract

market ranged from 37 percent to 89

percent. For March 12, 1997, the overall

percentage of trades with timing

windows of two minutes or less was 83

percent and the percentages for the

seven affected contract markets ranged

from 62 percent to 87 percent.

On June 30, 1997, the Exchange

provided windows data for three

additional trade dates selected at

random by the Commission which

showed that the overall percentage of

trades with timing windows of two

minutes or less ranged from 82 percent

to 85 percent. The percentage of trades

with timing windows of two minutes or

less computed separately for each of the

seven affected contract market ranged

from 65 to 92 percent on May 28, 1997;

66 to 86 percent on June 5, 1997; and

60 to 88 percent on June 10, 1997. Thus,

the Exchange has not demonstrated that

its imputed trade execution times are

sufficiently reliable, precise, and

verifiable in that it has not established

that 90 percent or more of such times

are imputed within timing windows of

two minutes or less.11

The negative impact on the

components of the Exchange’s trade

monitoring system resulting from its

failure to satisfy the 90 percent

performance standard is exacerbated

because CME does not require the

recordation of a member’s personal and

customer trades in sequence.12 Given

the absence of such a recordation

requirement, reliably accurate trade

times are essential for effective

determination of the sequence of trades.

Where the sequence of customer and

personal trades is not determined,

possible dual trading-related abuses,

such as trading ahead of customer

orders and trading against customer

orders, could go undetected.

Other Components of CME’s Audit Trail

System

With regard to the requirement that

trade data be provided continually to

the Exchange in accordance with

Section 5a(b)(3)(A)(ii) of the Act,

exchange audit trail systems must

provide trade data, including trade

timing information, on a periodic, but

not necessarily real-time, basis.13 Such

information also must be obtained in a

timely manner. The Exchange requires

that clearing members submit trade data

for clearing no later than 60 minutes

after the end of the last time bracket on

the trading card or floor order ticket.

CME’s trade data, therefore, are

provided periodically to the Exchange at

no more than hourly intervals, which is

continual.

With regard to unalterability, as

mandated by Section 5a(b)(3)(A)(i) of

the Act, the Exchange’s trade records are

unalterable, since they are recorded on

trading cards and order tickets in

nonerasable ink. Trade corrections also

are not permitted to obscure original

data.14
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60863

15See Audit Trail Re-Test Report at 40.

16Commission Regulation 1.35(d)(2) requires that

each member of a contract market recording

purchases and sales on trading cards must record

such purchases and sales in exact chronological

order of execution on sequential lines of the trading

card.

17 60 FR 58049 (November 24, 1995).

18Although primarily employed for dispute

resolution, the 38 cameras run continuously

throughout the trading day and may enable

investigators to view virtually all activity in the

quadrant to resolve irregularities detected by the

Exchange’s computerized surveillance system or to

follow up on tips from members, clerks or floor

surveillance staff.

CME’s imputed timing system, which

uses data from sources other than the

trader, as well as data provided by the

trader, to derive times, also meets the

Section 5a(b)(3)(A)(iii) standards for

independence, to the extent

practicable.15 The Exchange’s existing

system uses, among other things, data

generated by both buyers and sellers for

personal trades, including trading card

numbers and sequence of trades on

trading cards, certain execution times

required to be entered manually, entry

and exit timestamps on order tickets,

time and sales data and 15-minute

bracket codes to impute trade execution

times.

The Exchange requires that personal

trades be recorded in sequence,

consistent with Commission

regulations, by requiring that members

record such trades in sequence on prenumbered trading cards.16 The

Exchange adopted a single-sided trading

card on which all personal buy and sell

trades are required to be recorded

sequentially in response to an Audit

Trail Report recommendation. However,

as noted elsewhere, the Exchange does

not require the recordation of a

member’s personal and customer trades

in sequence. Given the absence of such

a recordation requirement, reliably

accurate trade times are essential for

effective determination of the sequence

of trades.

CME enforces its audit trail

requirements and integrates audit trail

data into its surveillance system for dual

trading-related abuses. However,

because the Exchange’s trade

surveillance system incorporates into its

data, including exception reports, an

impermissible amount of imputed trade

execution times that are not reliably

accurate, the effectiveness of the

Exchange’s integration of audit trail data

is diminished.

As required by Section 5a(b)(1)(B) of

the Act, CME’s trade entry and outtrade

resolution programs capture certain

essential data on cleared trades,

unmatched trades, and outtrades.

Finally, with regard to broker receipt

times, the Commission finds that it is

not practicable at this time for CME to

record the time that each order is

received by a floor broker for execution.

Immediately executable flashed orders,

however, are in substantial compliance

with the objectives of Section 5a(b)(3)(B)

of the Act, as stated previously by the

Commission in its Order on flashed

orders and broker receipt times.17

Physical Observation of Trading Areas

CME’s trade monitoring system

satisfies the requirements of Section

5a(b)(1)(A) of the Act in that CME

maintains and executes an adequate

program for physical observation of

Exchange trading areas and integrates

the information obtained from such

observation into its compliance

programs. The Exchange conducts daily

floor surveillance during the open and

close on all affected contract markets

and at random times during each

trading day. CME also performs floor

surveillance when warranted by special

market conditions, such as exceptional

volatility or contract expirations.

Finally, the Exchange employs a video

camera logging system in the interest

rate quadrant on the upper trading

floor.18

Recordkeeping System

CME’s recordkeeping system captures

certain essential data on trades and uses

information from the records and

violations of recordkeeping

requirements to bring appropriate

disciplinary actions. However, the

Exchange needs to improve member

compliance with Regulation 1.35(j), in

that only 83 percent of the trading cards

selected for review by Division staff

were submitted to the clearing member

within 15 minutes following 30-minute

trading intervals and timestamped

promptly to the nearest minute

following collection.

In addition, because CME does not

meet the 90 percent performance

standard, the system captures an

impermissible amount of trade timing

data that is not reliably accurate. This

circumstance is compounded by the fact

that CME does not require the

recordation of personal and customer

trades in sequence. As a result, the

Exchange’s recordkeeping system is

limited in its capability to capture

essential data on the sequence of

customer trades.

CME generally conducts back office

audits of trading cards and order tickets

at each clearing member firm at least

once a year for a representative sample

of customer orders and personal trades.

CME also uses a computerized tracking

system to monitor member compliance

daily with certain trade timing and

sequencing requirements, regularly

examines trading records during the

course of investigations for possible

recordkeeping violations, and uses

information from these audits to

generate investigations. The Exchange

requires that the account identifier

reflected on the floor order ticket relate

back to the ultimate customer account.

Surveillance Systems and Disciplinary

Actions

The inclusion of an impermissible

amount of trade timing data that is not

reliably accurate in the Exchange’s trade

monitoring system diminishes the

capability of the Exchange’s trade

surveillance system to review trade data

effectively, and as a result, possible dual

trading-related abuses could go

undetected. Further, the lack of reliably

accurate trade timing data diminishes

the capability of the Exchange’s

disciplinary program to bring

appropriate disciplinary actions against

violators. In other respects, the

Exchange’s trade surveillance system

may be capable of reviewing and is used

to review trading data on a regular basis

to detect possible dual trading-related

abuses and other customer order abuses.

In addition, CME did bring disciplinary

actions against offenders and issued

meaningful penalties against violators.

Therefore, CME has demonstrated the

capability to use information generated

by its trade monitoring and audit trail

systems on a consistent basis to bring

appropriate disciplinary action for

violations relating to the making of

trades and execution of customer orders

as required by Sections 5a(b)(1)(C), (D)

and (F) of the Act. Further, CME refers

appropriate cases to the Commission.

On a daily basis, CME reviews

computerized surveillance reports

generated by the Exchange’s Automated

Trade Surveillance system to detect

possible instances of dual tradingrelated abuses and other trading abuses.

All relevant trade data, including

account numbers, are included in these

reviews. Among the computerized

exception reports generated by the

Exchange and reviewed daily are those

designed to identify such suspicious

trading activity as trading ahead of a

customer, trading against a customer,

wash trading, and trading against a

customer with a collaborator, as well as

those designed to provide data on

personal profit and loss, member dual

trading and outtrade resolution. Once an

investigation has been opened, the

Exchange’s Compliance Department can

use video cameras, on a for cause basis,
60864 Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices

19 During 1996, the CME significantly expanded

its video surveillance capability. The two cameras

on the upper trading floor were replaced with ten

cameras, and the single camera on the lower trading

floor was replaced with seven cameras. All 17 are

state-of-the-art ‘‘pan, tilt and zoom’’ professional

grade cameras.

to assist in the conduct of the

investigation.19

During 1996, the Exchange initiated

429 investigations and/or inquiries into

all types of trading-related abuses.

Approximately 80 percent of the

investigations opened and closed during

1996 were closed within the four-month

standard set forth in Regulation 8.06.

During that same period, the Exchange

initiated 98 dual trading-related

investigations and referred three of

these investigations to a disciplinary

action committee. During the period of

January 1994 through December 1996,

CME assessed substantial penalties in

14 disciplinary actions involving dual

trading-related abuses.

Commitment of Resources

The Commission finds that CME

meets the requirements of Section

5a(b)(1)(E) of the Act by committing

sufficient resources for its trade

monitoring system to be effective in

detecting and deterring violations and

by maintaining an adequate staff to

investigate and to prosecute disciplinary

actions. For fiscal year 1996, CME

committed 99 personnel to the

Exchange’s Compliance, Market

Surveillance and Audits Departments

and reported its total self-regulatory

costs to be $15,388,000. CME’s reported

volume for this period was 177,027,583

contracts, and the number of trades

exceeded 16,000,000.

Accordingly, the Commission Hereby

Orders that:

The Exchange must implement the

following corrective action: achieve

compliance with the 90 percent

performance standard.

The Commission further orders that:

Until such time as the Exchange

demonstrates that its trade monitoring

system satisfies the relevant standards,

the Exchange shall be subject to the

following condition: Within 60 days

from the effective date of a final Order,

the Exchange must implement and

enforce the limited dual trading

restriction described in the Appendix to

this proposed Order, which is less

restrictive than the dual trading

prohibition of Section 4j of the Act and

Regulation 155.5. Such dual trading

restriction currently would apply to the

following affected contract markets:

Live Cattle, Deutsche Mark, Japanese

Yen, Swiss Franc and Eurodollar futures

contracts and the option contracts on

Eurodollar and S&P 500 futures.

Accordingly, the Commission

proposes to grant CME’s Petition for

Exemption, subject to the stated

condition, from the dual trading

prohibition for trading in its Live Cattle,

Deutsche Mark, Japanese Yen, Swiss

Franc and Eurodollar futures contracts

and the option contracts on Eurodollar

and S&P 500 futures.

If, at any time, CME believes that it

can demonstrate to the Commission’s

satisfaction that it meets, for an affected

contract market subject to this Order, all

of the standards set forth in this Order,

including, but not limited to, those in

Section 5a(b) and Regulation 155.5, the

Exchange may petition for an

unconditional exemption to the dual

trading prohibition for that affected

contract market.

Unless otherwise specified, the

provisions of this proposed Order shall

be effective on the date on which it is

issued as a final Order by the

Commission, and the condition shall

become effective as stated herein and

shall remain in effect unless and until

removed, as provided above, or revoked

in accordance with Section 8e(b)(3)(B)

of the Commodity Exchange Act, 7

U.S.C. 12e(b)(3)(B). Failure of CME to

abide by the condition of a limited dual

trading restriction will automatically

cause the dual trading prohibition set

forth in Section 4j of the Act and

Regulation 155.5 to go into effect.

If other CME contract markets become

affected contract markets after the date

this Order becomes final, the Exchange

would be required, absent submission of

a dual trading exemption petition, to

restrict dual trading in those affected

contract markets in accordance with the

dual trading prohibition set forth in

Section 4j of the Act and Regulation

155.5. Further, if CME demonstrates to

the Commission’s satisfaction that an

affected contract market subject to this

Order has ceased to meet the Regulation

155.5(a)(9) affected contract market

threshold, that contract market no

longer would be subject to this Order.

Dated: November 7, 1997.

By the Commission.

Edward W. Colbert,

Deputy Secretary.

Appendix—Dual Trading Restriction

a. Restriction

A floor broker is prohibited from executing

customer orders in an affected contract

market month, as defined below, during the

same pit trading session in which the floor

broker executes directly, or initiates and

passes to another member for execution, a

transaction in any such affected contract

market month for (1) the floor broker’s own

account, (2) any account in which the floor

broker’s ownership interest or share of

trading profits is ten percent or more, (3) any

account for which the floor broker has

trading discretion, or (4) any other account

controlled by a person with whom such floor

broker is subject to trading restrictions under

Section 4j(d) of the Act to the extent such

section is applied by Commission regulation

or order.

b. Affected Contract Market Month (Volume)

Affected contract market month means: (1)

For each affected non-agricultural contract

market, any contract market month with an

average daily trading volume of 10,000

contracts or more as determined by, at the

election of the Exchange, either (i) CME Rule

552 with respect to a contract month position

or (ii) trading in the previous calendar

month; and (2) For each affected agricultural

contract market, any contract market month

with an average daily trading volume of

10,000 contracts or more as determined by

trading in the previous calendar month. For

this purpose, daily trading volume means the

total number of contracts sold (or bought) in

any contract month of an affected contract

market during a trading day, with the average

computed as set forth above and excluding

ex-pit transactions as permitted under

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 to

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 contained in CME Rule 552 or

other 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.

Dissenting Opinion of Commissioner

Barbara Pedersen Holum on the Disposition

of the Chicago Mercantile Exchange’s Dual

Trading Petition

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

Exchange Act requires the Commission to

exempt a contract market unconditionally

from the dual trading prohibition of Section
Federal Register / Vol. 62, No. 219 / Thursday, November 13, 1997 / Notices 60865

1The Commission has previously discussed in

several instances, including its November 28, 1994

Report to Congress on Futures Exchange Audit

Trails, the possible abuses attendant to dual trading.

See also the Commission’s Proposed Regulation

Prohibiting Dual Trading by Floor Brokers, 56 FR

13025 (March 9, 1993).

2Affected 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) of the

Act. As noted by the Commission in promulgating

Regulation 155.5, a contract market trading on an

exchange floor will be considered separate from a

contract market in the same commodity trading a

screen-based trading system. The Commission

further stated that, while not excluding electronic

trading from the dual trading prohibition, the

Commission was retaining the flexibility to

consider the matter further. See 58 FR 40335 (July

28, 1993). The Commission is not addressing

screen-based trading in this proposed Order.

3 62 FR 7754 (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. By letter dated June 22, 1994, CBT

informed the Commission 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 CBT had not

sufficiently demonstrated that its existing audit trail

system met current and future standards, the

Commission required the Exchange to demonstrate

Continued

4j(a) of the Act upon finding that the trade

monitoring system satisfies the requirements

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

detecting and deterring dual trading-related

abuses. I dissent from the Commission’s

proposed Order granting the CME a

conditional exemption in seven affected

markets.

Based on information provided to the

Commission, I find that the CME’s trade

monitoring system as a whole effectively

detects and deters dual trading abuses and

therefore accomplishes the intended

objectives of the Act. Additionally, in 1991

the CME implemented a dual trading

restriction as part of its trade monitoring

system which the Commission approved. The

Commission has reviewed the CME’s

enforcement of that restriction over the past

six years and found it to be effective.

Therefore, I find that CME’s trade

monitoring system, including its dual trading

restriction, meets the standards for an

unconditional exemption from the dual

trading prohibition.

[FR Doc. 97–29892 Filed 11–12–97; 8:45 am]

BILLING CODE 6351–01–P

COMMODITY FUTURES TRADING

COMMISSION

Chicago Board of Trade Petition for

Exemptions 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: Notice of intent to condition

and proposed order granting conditional

exemptions from the prohibition on

dual trading in 13 affected contract

markets.

SUMMARY: For the reasons set forth in

the Proposed Order Granting

Conditional Dual Trading Exemptions

(‘‘proposed Order’’), the Commodity

Futures Trading Commission

(‘‘Commission’’) intends to grant,

subject to the stated conditions, the

petition of the Chicago Board of Trade

(‘‘CBT’’ or ‘‘Exchange’’) for exemptions

from the dual trading prohibition in

Section 4j(a) of the Commodity

Exchange Act (‘‘Act’’) and Commission

Regulation 155.5 for its Wheat, Corn,

Soybean, Soybean Meal, Soybean Oil,

U.S. Treasury Bond, 10-Year Treasury

Note, and 5-Year Treasury Note futures

contracts and the option contracts on

the Corn, Soybean, U.S. Treasury Bond,

10-Year Treasury Note, and 5-Year

Treasury Note futures. Pursuant to the

Act and Commission Regulation

155.5(d)(8)(C)(iii), CBT may submit

written supplemental data, views or

arguments and will have an opportunity

to make an oral presentation to the

Commission before the Commission

makes its final determination.

DATES: If CBT intends to make an oral

presentation, it must submit its request

in writing no later than ten days after

receipt of this proposed Order. CBT

must submit any written supplemental

data, views or arguments within 30 days

of receipt of this proposed Order.

ADDRESSES: CBT’s request for oral

presentation and submission of written

supplements are to be sent to the Office

of the Secretariat, Commodity Futures

Trading Commission, Three Lafayette

Centre, 1155 21st Street, N.W.,

Washington, D.C. 20581.

FOR FURTHER INFORMATION CONTACT:

Rachel Fanaroff Berdansky, Special

Counsel, or Duane C. Andresen, Special

Counsel, Division of Trading and

Markets, Commodity Futures Trading

Commission, Three Lafayette Centre,

1155 21st Street, N.W., Washington,

D.C. 20581; telephone: (202) 418–5490.

SUPPLEMENTARY INFORMATION: A floor

broker engages in dual trading when he

or she executes a customer’s order

during the same trading session in

which he or she executes, directly or

indirectly, a trade in the same contract

for his or her own account or an account

in which he or she has an interest. Dual

trading can afford floor brokers the

opportunity to abuse customer orders if

audit trail information and surveillance

are insufficient to permit the detection

of such abuses. Specifically, a dual

trading floor broker can directly commit

abuses of customer orders such as

trading ahead or against those orders

and also has an informational advantage

for his or her personal trading.1 Section

4j(a) of the Act and Regulation 155.5

prohibit dual trading and establish trade

monitoring standards that must be met

in order for contract markets to be

exempted from the prohibition.

The Commission intends to issue the

following proposed Order granting CBT

conditional dual trading exemptions

pursuant to Section 4j(a) of the Act and

Commission Regulation 155.5. In

accordance with Regulation 155.5(d)(8),

CBT may submit to the Commission in

writing any supplemental data, views or

arguments within 30 days of receipt of

this Notice and proposed Order. In

addition, CBT may request, in writing

within ten days of receipt of this Notice

and proposed Order, an opportunity to

make an oral presentation to the

Commission. If CBT submits a request

for an oral presentation, the Exchange

will be notified by the Commission of

the date and the terms under which CBT

may make such presentation. Public

notice of such an oral presentation also

will be provided in accordance with the

requirements of the Government in the

Sunshine Act, 5 U.S.C. 552b (Supp. I

1995).

Proposed Order Granting Conditional

Dual Trading Exemptions

On October 25, 1993, CBT submitted

a Petition for Exemption from the Dual

Trading Prohibition contained in

Section 4j of the Act and Commission

Regulation 155.5 for its Wheat, Corn,

Soybean, Soybean Meal, Soybean Oil,

U.S. Treasury Bond, 10-Year Treasury

Note, and 5-Year Treasury Note futures

contracts and the option contracts on

the U.S. Treasury Bond and 10-Year

Treasury Note futures. The Exchange

corrected that petition on December 2,

1993. Subsequently, by letters dated

March 25 and May 14, 1994, CBT

supplemented its petition to include the

option contracts on its Corn, Soybean

and 5-Year Treasury Note futures since

such contract markets had reached

average daily volumes of 8,000 contracts

and, thus, had become affected contract

markets (‘‘affected contract markets’’) as

defined in the Act and regulations

thereunder.2 CBT updated its petition

on January 17, 1997, with respect to all

13 of its affected contract markets.

Notice of the public availability of the

CBT’s updated exemption petition was

published in the Federal Register on

February 20, 1997.3