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[Federal Register: June 10, 1999 (Volume 64, Number 111)]
[Notices]
[Page 31193-31195]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr10jn99-61]

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COMMODITY FUTURES TRADING COMMISSION


Chicago Board of Trade Petition for Exemption From the Statutory
Dual Trading Prohibition in the Ten-Year U.S. Treasury Note Futures
Contract Traded on the Project A Electronic Trading System

AGENCY: Commodity Futures Trading Commission.

ACTION: Amended order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
amending its February 26, 1999 Order granting the Chicago Board of
Trade (``CBT'') or ``Exchange'') an exemption from the statutory
prohibition against dual trading in the U.S. Treasury Bond futures
contract (``T-Bond'') traded on its Project A electronic trading system
to include the Ten-Year U.S. Treasury Note (``Ten-Year T-Note'')
futures contract traded on Project A.

DATES: This Order is to be effective June 4, 1999.

FOR FURTHER INFORMATION CONTACT: Rachel F. Berdansly, Special Counsel,
Division of Trading and Markets, Commodity Futures Trading Commission,
Three Lafayette Center, 1155 21st St., NW., Washington, DC 20581;
telephone (202) 418-5490.

SUPPLEMENTARY INFORMATION: On February 26, 1999, the Commission issued
an Order granting CBT an exemption from the statutory dual trading
prohibition for its T-Bond futures contract as traded on the Exchange's
electronic trading system, Project A.\1\ In issuing the Order, the
Commission found that CBT met the standards for granting a dual trading

[[Page 31194]]

exemption contained in section 4j(a) of the Commodity Exchange Act
(``Act'') and Commission Regulation 155.5 with regard to Project A T-
Bond futures.
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    \1\ 64 FR 10450 (March 4, 1999). A copy of this Order is
attached as Appendix A.
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    By letter dated March 15, 1999, shortly after the Order was issued,
CBT notified the Commission that its Ten-Year T-Note futures contract
traded on Project A had become an affected contract market as well, and
supplemented its Petition for Exemption from the Dual Trading
Prohibition to include that contract.\2\ The Exchange has represented
by letter dated April 20, 1999, that, with respect to the February 26,
1999 Order exempting Project A T-Bond futures from the dual trading
prohibition, there have been no material changes concerning the
operation of the Project A system or to CBT's trade monitoring system
as applicable thereto. Therefore, the Commission finds that CBT meets
all relevant standards for granting a dual trading exemption for the
Ten-Year T-Note future contract as traded on Project A.
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    \2\ An ``affected contract market'' is 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. Under
section 4(j(a) of the Act and Regulation 155.5(b), the dual trading
prohibition applies to each affected contract market. The
Commission, therefore, must consider separately each affected
contract market. 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 on a screen-based system such as Project A. See 58
FR 40335 (July 28, 1993).
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    Accordingly, on this date, the Commission hereby amends its
February 26, 1999 Order granting CBT's Petition for Exemption from the
Dual Trading Prohibition for trading on Project A of its electronically
traded U.S. Treasury Bond futures contracts to include an exemption for
CBT's electronically traded Ten-Year U.S. Treasury Note futures
contract.
    For this exemption to remain in effect, CBT 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 CBT's program.
    The provisions of this Order shall be effective on the date on
which it is issued and shall remain in effect unless and until its is
revoked in accordance with section 8e(b)(3)(B) of the Commodity
Exchange Act, 7 U.S.C. 12e(b)(3)(B). If other CBT contracts
electronically traded on Project A become affected contracts after the
date of this Order, the Commission may expand this Order in response to
an updated petition that includes those contracts.
    It is so ordered.

    Dated: June 4, 1999.
Jean A. Webb,
Secretary to the Commission.

APPENDIX A--COMMODITY FUTURES TRADING COMMISSION

Chicago Board of Trade Petition for Exemption From the Dual Trading
Prohibition in the U.S. Treasury Bond Futures Contract Traded on the
Project A Electronic Trading System

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 Board of Trade (``CBT'' or
``Exchange'') for exemption from the prohibition against dual
trading in the U.S. Treasury Bond futures contract traded on its
Project A electronic trading system.

DATES: This Order is to be effective February 26, 1999.

FOR FURTHER INFORMATION CONTACT: Andrew S. Baer, Attorney-Advisor,
Division of Trading and Markets, Commodity Futures Trading
Commission, Three Lafayette Centre, 1155 21st St., NW., Washington,
DC 20581; telephone (202) 418-5490.

SUPPLEMENTARY INFORMATION: On January 31, 1998, the Chicago Board of
Trade (``CBT'' or ``Exchange'') submitted a Petition for Exemption
From the Dual Trading Prohibition for its affected U.S. Treasury
Bond (``T-Bond'') futures contract \1\ as traded on the Exchange's
electronic trading system, Project A. Upon consideration of this
petition and other matters of record, the Commission hereby finds
that CBT meets the standards for granting a dual trading exemption
contained in section 4j(a) of the Act and Commission Regulation
155.5 with regard to Project A T-Bond futures.\2\
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    \1\ An ``affected contract market'' is 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 Commodity
Exchange Act (``Act''). Under section 4j(a) of the Act and
Regulation 155.5(b), the dual trading prohibition applies to each
affected contract market. The Commission, therefore, must consider
separately each affected contract market. 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 on a screen-based system such as Project
A. See 58 FR 40335 (July 28, 1993). Therefore, Project A T-Bonds
must be considered independently of the CBT's floor-traded T-Bond
contract market, which was included in the Exchange's exemption
petition for its affected open outcry contract markets.
    \2\ The burden to prove that the exemption standards of the Act
and Commission regulations are met rests exclusively on the contract
market. The dual trading provisions set forth in section 4j of the
Act and the standards for trade monitoring systems provided in
section 5a(b) of the Act were enacted as part of the Futures Trading
Practices Act of 1992 (``FTPA''). Pub. L. 102-546, 101, 106 Stat.
3590 (1992). The FTPA's legislative history makes clear that the
burden to prove that the exemptions standards are met rests upon the
contract market. For instance, the 1992 House-Senate Conference
Committee stated that ``a board of trade may satisfy the initial
burden of demonstrating that each of its designated contract markets
complies with trade monitoring system requirements of section 5a(b)
of the Act, subject to requests for further information by the
Commission, by showing that it has maintained an ongoing record of
compliance with those requirements.'' H.R. Conf. Rep. No. 102-978 at
53 (1992). The Conference Committee adopted the 1991 House Bill's
(H.R. 707) dual trading provisions, with amendments relating to
exemptions. Id. at 50. The 1991 Senate Bill (S. 207) similarly
placed on the exchange the burden to demonstrate the ability of its
systems to meet the standards and reiterated the view, previously
expressed in the 1989 Senate Bill (S. 1729), that an exchange has
the best access to its own records and therefore is in the best
position to show that its systems are effective and satisfactory. S.
Rep. No. 102-22 at 32 (1991); S. Rep. No. 101-191 at 39-40 (1989).
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    Subject to CBT's continuing ability to demonstrate that it meets
applicable requirements, the Commission specifically finds that CBT
maintains a trade monitoring system for Project A which is capable
of detecting and deterring, and is used on a regular basis to detect
and 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 Commission Regulation 155.5. The Commission
further finds that CBT's trade monitoring system for Project A T-
Bonds includes audit trail and recordkeeping systems that satisfy
sections 4j(a)(3) and 5a(b) of the Act and Commission Regulations
1.35 and 155.5.\3\
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    \3\ 17 CFR 1.35, 155.5. Section 4j(a)(3) requires the Commission
to exempt a contract market from the prohibition against dual
trading upon finding that the monitoring system in place at the
contract market satisfies the requirements of section 5a(b),
governing audit trails and trade monitoring systems, with regard to
violations attributable to dual trading at such contract market. If
the trade monitoring system does not satisfy the requirements,
section 4j(a)(3) requires the Commission to deny the exemption or in
the alternative to exempt a contract market from the prohibition
against dual trading on stated conditions upon finding that there is
a substantial likelihood that a dual trading prohibition would harm
the public interest in hedging or price basing and that corrective
actions are sufficient and appropriate to bring the contract market
into compliance with the standards set forth in section 5a(b).
Regulation 155.5(b) prohibits floor brokers from dual trading in an
affected contract market unless that contract market is exempted
under Regulation 155.5(d).
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    With respect to each required component of the trade monitoring
system, the Commission finds as follows:
    (a) Physical Observation of Trading Areas--The requirements of
section 5a(b)(1)(A) of the Act are not relevant to Project A
trading, insofar as Project A is a computerized, screen-based system
and therefore has no floor.
    (b) Audit Trail and Recordkeeping Systems--The Exchange's trade
monitoring system for Project A T-Bonds satisfies the audit trail
standards of section 5a(b)(1)(B) of the Act in that it is capable of
capturing essential data on the terms, participants, and

[[Page 31195]]

sequence of transactions. The requirements of that Section regarding
the capture of relevant data on unmatched trades and outtrades are
not relevant to Project A trading, as unmatched trades and outtrades
cannot occur on the Project A system. The Commission further finds
that CBT accurately and promptly records the essential data on
terms, participants, times (in increments of no more than one minute
in length), and the sequence of Project A trades through a means
that is unalterable, continual, independent, reliable, and precise,
as required by section 5a(b)(3) of the Act. This includes the real-
time submission of trades to clearing as they are matched by the
system. Consistent with the guidelines to Commission Regulation
155.5, the Commission also finds that CBT has demonstrated the use
of Project A T-Bond trade timing data in its surveillance systems
for dual trading-related and other abuses.
    The audit trail produced by Project A for T-Bond futures
includes trade execution times that are presumptively 100 percent
accurate (barring computer malfunction) and precise to within \1/
100\th of a second. All trades are also recorded in the exact
sequence of occurrence. Among other things, the order ticket
timestamps required by Regulation 1.35(a-1) are automatically
furnished by the system, independent of the person making the trade,
as is the order number. Project A also automatically records the
time at which a terminal operator enters an order, the time when an
order is matched to make a trade, the time the system generates a
confirmation message to a terminal operator, and the time of any
changes to an order. Once entered, orders and records of changes to
orders are unalterable and cannot be deleted. If an order cannot be
entered immediately upon its receipt by a terminal operator, the
order is recorded on a written order ticket, timestamped, and then
entered when possible. For every Project A order, either this order
ticket timestamp or the order entry time recorded by the system acts
as the broker receipt time required by section 5a(b)(3)(B) of the
Act.
    CBT satisfies the requirements of section 5a(b)(1)(B) of the Act
by maintaining an adequate recordkeeping system that is able to
capture essential data on the terms, participants, and sequence of
transactions executed on Project A. The Exchange uses such data as
well as information on violations of such requirements on a
consistent basis to bring appropriate disciplinary actions relating
to Project A trading.
    (c) Surveillance Systems and Disciplinary Action--As required by
sections 5a(b)(1)(C), (D), and (F) of the Act, CBT uses 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 on Project A. In addition, CBT assesses meaningful
penalties against violators.
    On a daily basis, CBT reviews computerized surveillance
exception reports to detect dual trading-related and other trading
abuses on Project A. All relevant trade data are included in these
reports. The exception reports are designed to identify such
suspicious activity as trading ahead, frontrunning, trading against,
crossing orders, and wash trading. Since the introduction of side-
by-side (simultaneous Project A and open outcry) trading of T-Bonds
in September 1998, CBT has begun using a specialized exception
report designed to identify certain trading ahead violations that
use both the Project A and open outcry markets. The CBT has stated
that it intends to develop systems and programs that integrate
survelliance of its Project A and open outcry markets. The Exchange
should be diligent in pursuing this process.
    From January, 1997 through December, 1998, the Exchange
initiated 21 investigations into all types of possible abuses on
Project A, nine of which had been closed as of December, 1998. One
of those nine was closed within the four-month objective set forth
in Commission Regulation 8.06, and another three were closed within
four to six months. Thus, only 44 percent of those Project A
investigations opened and closed during 1997-98 were closed within
six months. If CBT cannot complete its Project A investigations
within the objective set by Regulation 8.06, it should provide the
reasons why such investigations require more than four months to
complete. Based on examination of its computerized surveillance
reports, CBT initiated four dual trading-related investigations
during that period, one of which resulted in referral to a
disciplinary committee. As of December 1998 that case was still
pending. In other Project A-related disciplinary actions, the
Exchange levied $20,000 in fines, imposed one ten-day suspension,
and issued four reprimands.
    (d) Commitment of Resources--The Commission finds that CBT meets
the requirements of section 5a(b)(1)(E) by committing sufficient
resources for its trade monitoring system relating to Project A,
including automating elements of such trade surveillance system, to
be effective in detecting and deterring violations. CBT also
maintains an adequate staff to investigate and to prosecute
disciplinary actions.
    Accordingly, on this date, the Commission hereby grants CBT's
Petition for exemption from the dual trading prohibition for trading
on Project A of its electronically traded U.S. Treasury Bond futures
contracts.
    For this exemption to remain in effect, CBT 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 CBT's program.
    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). If other CBT contracts
electronically traded on Project A become affected contracts after
the date of this Order, the Commission may expand this Order in
response to an updated petition that includes those contracts.
    It is so ordered.

    Dated: February 26, 1999.
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 99-14712 Filed 6-9-99; 8:45 am]
BILLING CODE 6351-01-M
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