Chicago Mercantile Exchange Proposed Rule Amendments To Establish a Globex Foreign Exchange Facility

COMMODITY FUTURES TRADING COMMISSION

Chicago Mercantile Exchange Proposed Rule Amendments To Establish

a Globex Foreign Exchange Facility

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed rule amendments of the Chicago Mercantile

Exchange to establish a Globex Foreign Exchange Facility.

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SUMMARY: The Chicago Mercantile Exchange (``CME'' or ``Exchange'') has

submitted proposed rule amendments and other materials which would

establish a wholly-owned subsidiary of the Exchange which would

function as a market maker for certain CME foreign currency futures

contracts traded

[[Page 9679]]

through the Globex system.\1\ Acting pursuant to the authority

delegated by Commission Regulation 140.96, the Division of Trading and

Markets has determined to publish the CME proposal for public comment.

The Division believes that publication of the CME proposal is in the

public interest and will assist the Commission in considering the views

of interested persons.

\1\ The CME proposal includes newly proposed Rule 586.

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DATES: Comments must be received on or before April 10, 1996.

FOR FURTHER INFORMATION CONTACT:

Clarence Sanders, Attorney, Division of Trading and Markets, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street

NW., Washington, DC 20581. Telephone: (202) 418-5484.

SUPPLEMENTARY INFORMATION:

I. Description of Proposed Rule Amendments

A. Purpose

By letters dated January 22, and February 1, 1996, the CME

submitted proposed rule amendments pursuant to Section 5a(a)(12)(A) of

the Commodity Exchange Act (``Act'') and Commission Regulation 1.41(b).

The proposed amendments would establish a Globex Foreign Exchange

Facility (``GFF''). Under the proposal, the GFF would function as a

market maker for certain CME foreign currency futures contracts traded

through the Globex system.\2\ The objective of the GFF would be to

augment the liquidity of certain Globex foreign currency futures

contracts. In so doing, the CME believes that the GFF would help to

ensure the presence of relatively liquid markets and narrower bid/ask

spread quotations for trading in foreign currency futures contracts

through the Globex system.

\2\ Globex is an electronic trade execution system for trading

in certain of the Exchange's futures and options contracts outside

of the CME's regular trading hours. Additionally, certain contracts

of the Marche A Terme International de France are listed for trading

through Globex.

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B. Operation

The GFF would be organized as a wholly-owned subsidiary of the CME.

The Exchange would independently capitalize the GFF, thereby providing

the GFF with separate financial resources. GFF employees who operate

Globex terminals would be subject to all applicable CME rules governing

Globex trading. The GFF would be subject to the rules and regulations

of the Exchange in the same manner as any other participant conducting

transactions on the Exchange.

Operations of the Exchange, as a self-regulatory organization, and

the GFF, as a subsidiary entity, would be separated. The GFF would have

neither direct nor indirect access to Exchange information on market

positions or market exposures of clearing firms and individuals.

The GFF would operate as a market maker during the electronic

trading hours (``ETH'') session of the Globex system. GFF trading

activities would be confined to trading solely for the account of the

GFF. GFF market making operations would be available during two 8\1/4\

hour shifts during the Globex ETH session.

At inception, the GFF would be authorized to make markets in

futures contracts for Deutsche marks, Japanese yen, Swiss francs, and

British pounds traded through Globex. After a period of time, however,

the GFF also would be authorized to make markets in futures contracts

in Australian dollars and Canadian dollars traded through Globex.

As a market maker, the GFF would (i) maintain a two-sided market in

the form of current bid and ask price quotations and (ii) satisfy bids

or offers of other market participants at the GFF's current bid and ask

prices. The GFF also would execute transactions through Globex on a

Request for Quote (``RFQ'') basis.\3\ The GFF would undertake to hedge

its Globex-originated positions by executing offsetting transactions in

the spot or forward interbank foreign currency market.

\3\ An RFQ is a Globex system alert by which a Globex user may

broadcast a message to all other users requesting a quotation.

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Market positions of the GFF would be carried on the books of a CME

clearing member firm. Under such an arrangement, the GFF would be a

customer of the carrying clearing member firm. The GFF intends to

liquidate its Globex-originated futures positions, along with any

corresponding interbank positions, during regular trading hours

(``RTH''). However, if the GFF did not liquidate all or part of its

Globex-originated futures position during RTH, then the GFF would be

required to meet performance bond margin requirements at its carrying

clearing member firm.

C. Oversight

The CME would establish risk management controls, including the

establishment of a GFF Oversight Committee and the appointment of a GFF

Risk Manager, to oversee GFF operations. Risk management controls

established by the CME would incorporate automated support systems,

including systems to track GFF audit trails and performance.

The GFF Oversight Committee would have authority to establish and

maintain trading limits, internal controls, and risk management

safeguards. The GFF Oversight Committee also would have authority to

halt trading operations of the GFF or order liquidation of GFF

positions at any time. The GFF Oversight Committee would periodically

report to the CME Board of Directors.

The GFF Risk Manager, the CME clearing member firm carrying GFF

positions, and CME Clearing House staff would review GFF trading on a

daily basis. Other CME staff would have oversight authority to review

books, records, systems, and facilities of the GFF. CME staff also

would have authority to review GFF trading activity for potential

regulatory violations or fraud.

II. Request for Comments

The Commission requests comments on any aspect of the CME's

proposed rule amendments that members of the public believe may raise

issues under the Act or Commission regulations. In particular, the

Commission requests comments regarding the impact on competitive

trading conditions; the adequacy of safeguards designed to limit the

Exchange's exposure to financial risk; the implications for financial

integrity and any consequent need for the segregation of, or

limitations on access to, information at the CME and the GFF; the need

for safeguards to address potential or actual conflicts of interest

arising out of the Exchange's operation of the GFF; the need for

restrictions on the personal trading activities of GFF employees; the

desirability of segregating GFF positions from the positions of other

customers at the clearing member firm carrying the GFF's positions; the

determination of appropriate means for assuring that a loss experienced

by the GFF would not affect other customers of the clearing member firm

carrying the GFF's positions; and whether any other conditions or

requirements should be imposed on the proposal.

Copies of the proposed rule amendments and related materials are

available for inspection at the Office of the Secretariat, Commodity

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street

NW, Washington, DC 20581. Copies also may be obtained through the

Office of the Secretariat at the above address or by telephoning (202)

418-5100. Some materials may be subject to confidential

[[Page 9680]]

treatment pursuant to 17 CFR 145.5 or 145.9.

Any person interested in submitting written data, views, or

arguments on the proposed rule amendments should send such comments to

Jean A. Webb, Secretary, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st Street NW, Washington, DC 20581, by the

specified date.

Issued in Washington, DC, on February 4, 1996.

Alan L. Seifert,

Deputy Director.

[FR Doc. 96-5606 Filed 3-8-96; 8:45 am]

BILLING CODE 6351-01-M