Application of FutureCom, LTD. as a Contract Market in Live Cattle Futures and Options

COMMODITY FUTURES TRADING COMMISSION

Application of FutureCom, LTD. as a Contract Market in Live

Cattle Futures and Options

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of application.

-----------------------------------------------------------------------

SUMMARY: FutureCom has applied for designation as a contract market for

the automated internet-based trading of cash-settled live cattle

futures and options. FutureCom has not previously been approved by the

Commission as a contract market in any commodity, thus, in addition to

the terms and conditions of the proposed futures and options contracts,

FutureCom has also submitted proposed trading rules, rules of

government, and other materials to meet the requirements for a board of

trade seeking initial designation as a contract market. Notice of

FutureCom's application was previously published for public comment on

January 31, 1997 (62 FR 4730). Many comments received in response to

that notice expressed the opinion that there were insufficient

materials and information available concerning the applicant, thus

commenters were unable to respond adequately to the request for

comment. Since the initial publication, the Commission has received

additional materials and information in support of the application.

Acting pursuant to the authority delegated by Commission Regulation

140.96, the Division of Trading and Markets (``Division'') has

determined to again publish the proposal for public comment. The

Division believes that publication of the proposal for comment at this

time is in the public interest, will assist the Commission in

considering the views of interested persons, and is consistent

[[Page 62567]]

with the purposes of the Commodity Exchange Act. The Division seeks

comment regarding all aspects of FutureCom's application and addressing

any issues commenters believe the Commission should consider.

DATES: Comments must be received on or before December 24, 1997.

FOR FURTHER INFORMATION CONTACT: With respect questions about the terms

and conditions of the proposed futures and option contracts, please

contact Fred Linse of the Division of Economic Analysis, Commodity

Futures Trading Commission, at Three Lafayette Centre, 21st Street NW,

Washington, DC 20581; Telephone: (202) 418-5273; Facsimile number:

(202) 418-5527; or Electronic mail: [email protected]. With respect to

questions about the trading rules and rules of government, please

contact Lois Gregory, Division of Trading and Markets, at the same

address; Telephone: (202) 418-5483; Facsimile number: (202) 418-5536;

or Electronic mail: [email protected].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

FutureCom, LTD., a limited Texas partnership, has applied for

designation as a contract market for the automated trading over the

internet of cash-settled live cattle futures and options. FutureCom has

not been approved previously by the Commission as a contract market in

any commodity, thus, in addition to the terms and conditions of the

proposed futures and options contracts, FutureCom has also submitted

proposed trading rules, rules of government, surveillance and

compliance procedures, system security documentation, and other

materials and documents to meet the requirements for a board of trade

seeking initial designation as a contract market.

Notice of FutureCom's application was previously published for

public comment on January 31, 1997 (62 FR 4730). Many comments received

in response to that notice expressed the opinion that there were

insufficient materials and information concerning the applicant

available at that time, thus commenters were unable to respond

adequately to the request for comment. By letter dated June 20, 1997,

the Division informed FutureCom that the running of the one-year review

period provided in Section 6 of the Commodity Exchange Act would be

stayed with respect to both the proposed futures and the proposed

option contract until the Commission received information which fully

addressed several major subject areas outlined in the letter. Since the

initial publication, the Commission has received a considerable amount

of additional material and information in support of the application.

Based on the adequacy of the information contained in the submissions

received to date, the Division has determined to lift the stay of the

one-year review period and to publish again the proposal for public

comment. The Division believes that publication of the proposal for

comment again at this time is in the public interest, will assist the

Commission in considering the views of interested persons, and is

consistent with the purposes of the Commodity Exchange Act.

FutureCom's affairs are managed under the direction of its Board of

Directors and it will operate on a for-profit basis. FutureCom has

proposed Bylaw provisions intended to meet requirements of various

Commission regulations concerning the composition of governing boards

and disciplinary committees. The FutureCom Board has the authority to

establish classifications of membership and the qualifications that an

applicant for membership must meet.

Each FutureCom member would have to maintain minimum net worth

requirements applicable to the member's FutureCom membership

classification. Every member would be a clearing member of the

Exchange. Any member not in compliance with minimum financial

requirements would not be able to engage in transactions except to

close out positions.

FutureCom's proposed Bylaws also address trading standards,

clearing and settlement, disciplinary proceedings, and arbitration.

Trades would be matched in accordance with a trade matching algorithm

based on a price-time priority. Traders could enter four types of

orders: market, limit, stop, and market-if-touched. The trading

standards would require each member to maintain records in accordance

with Commission regulations. Bylaws would govern exchange of futures

for physicals and position limits. Position limits would vary by

trading level assigned to each member. Trading levels would be assigned

based upon FutureCom's analysis of the credit risks associated with

each applicant.

Each member would enter into an account and clearing agreement with

FutureCom which would set forth, among other things, the details of the

clearing arrangement, initial margin, margin calls, default,

liquidation, trading and clearing fees, and order entry. All orders

entered into the FutureCom system would be cleared and settled

immediately upon execution through the First National Bank of Amarillo

(the ``Clearing Bank'') via a system of automatic electronic debits and

credits among traders' accounts. FutureCom and the Clearing Bank have

entered into a cash settlement procedures agreement and a custody

agreement. Initial margin for any order would have to be on deposit

with the Bank before any transaction was executed. Maintenance margin

notices would be sent by electronic mail and would specify the date,

time and amount due and members would be responsible for receiving and

assuring that funds were available to fund an electronic debit.

FutureCom would liquidate any position or positions upon any condition

of default including failure of a member to meet any margin call.

In the event of a trader default on a margin call, that margin

would be delivered by FutureCom to the Clearing Bank on the day the

default occurred. FutureCom intends to keep at least one million

dollars in the form of a letter of credit on hand with the Clearing

Bank for each listed futures and option contract. The amount would be

increased according to the open interest in the listed contract to up

to eight million dollars for open interest over 80,000 contracts.

Additionally, FutureCom will accrue a reserve fund to be held by the

Clearing Bank in a separate reserve fund account and be available

against member defaults. From the transaction fees assessed in

connection with each trade, the Exchange will apply $1.00 per contract

to the reserve fund. Losses from trader defaults exceeding the

FutureCom guarantee would be borne pro rata by all members according to

the number of outstanding open contracts on the day of the default.

FutureCom expects that generally, all members including those

members that otherwise maintain an account with an FCM, will enter

transactions on FutureCom directly. However, in some cases, FutureCom

members may, for a variety of reasons, prefer their FCM or other

intermediary, such as their commodity trading advisor, to enter orders

into the FutureCom system on their behalf. Any such intermediary, if

not a FutureCom member itself, would have to be approved and accepted

by FutureCom as an intermediary for the purpose of entering orders into

the trading system.\1\ The member would

[[Page 62568]]

give the FCM his I.D. and password for the purpose of entering the

order as instructed by the member.

---------------------------------------------------------------------------

\1\ Every member would be required to register the computer(s)

he/she/it intended to use to enter orders into FutureCom. Likewise,

any intermediary entering orders on behalf of a member would be

required to have the computer used to enter FutureCom orders

registered with FutureCom. Only orders from properly registered and

approved computers would be accepted into the FutureCom trading

system.

---------------------------------------------------------------------------

The Bylaws prohibit the entering of transactions designed to take

advantage of orders entered for another. These prohibitions include any

transaction that had been directly or indirectly prearranged, ones that

are in the nature of a wash sale, trading ahead, or the disclosing or

withholding of orders. FutureCom asserts, however, that generally, it

should be far more difficult, if not impossible, for many of the types

of unlawful trade practices to occur due to the fact that the

predominant number of orders will be entered directly by the member.

FutureCom represents it will use due diligence in maintaining a

continuing affirmative action program to secure compliance with various

provisions of the Commodity Exchange Act and Commission regulations and

with its own Bylaws. This will include trade practice and market

surveillance programs designed and described by FutureCom to detect the

trade practice abuses mentioned above as well as market manipulation,

investigations of alleged violations of other rules, and disciplinary

procedures. FutureCom's proposed Compliance Procedures require all

intermediaries entering orders on behalf of members to comply fully

with the requirements of Commission Regulation 1.35(a-1) consistent

with the Commission's advisory relating to alternative methods of

compliance with written record requirements.\2\ FutureCom expects these

records to be generated electronically in connection with the order

entry process.

---------------------------------------------------------------------------

\2\ ``Alternative Method of Compliance With the Written Record

Requirements,'' 62 FR 7675 (February 20, 1997).

---------------------------------------------------------------------------

FutureCom intends to ask the National Futures Association (``NFA'')

to administer FutureCom's financial surveillance and arbitration

programs and examine the books and records of joint FutureCom-NFA

members relating to the members' business of dealing in commodity

futures and options and cash commodities insofar as such business

relates to their dealing on FutureCom. In this regard, therefore, NFA

would assume the responsibilities of FutureCom set forth in Commission

Regulations 1.51(a)(3) and 1.52(c) for all FCMs that are members of

both FutureCom and NFA. Concerning arbitration, Commission Regulation

180.3(b)(4) requires each Commission registrant to include a registered

futures association on a list of organizations that are qualified to

conduct customer arbitration proceedings. As NFA is required to accept

appropriate demands for arbitration, there is no need for a written

agreement between FutureCom and NFA regarding delegation of FutureCom's

arbitration program to NFA.

The Commission's Office of Information Resources and Management has

reviewed the security of the proposed FutureCom trading system and

analyzed issues of system vulnerability and issues related to the

operation of the electronic trading system.

II. Request for Comments

Any person interested in submitting written data, views, or

arguments on the proposal to designate FutureCom should submit their

views and comments by the specified date to Jean A. Webb, Secretary,

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

Street, NW., Washington, DC 20581. In addition, comments may be sent by

facsimile transmission to facsimile number (202) 418-5521, or by

electronic mail to [email protected]. The Division seeks comment on

all aspects of FutureCom's application for designation as a new

contract market that would permit transmittal of orders over the

internet and match orders electronically. Comments should also include

the proposed clearing and settlement procedures, the ability of

FutureCom to fulfill its self regulatory duties, and any other issues

commenters believe the Commission should consider. Reference should be

made to the FutureCom application for designation as an automated

contract market for live cattle futures and options. Copies of the

proposed terms and conditions, Exchange rules, compliance procedures,

clearing and settlement description, and other related materials are

available for inspection at the Office of the Secretariat at the above

address. 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 treatment pursuant to 17 CFR

145.5 or 145.9. Requests or copies of such materials should be made to

the FOI, Privacy and Sunshine Act Compliance Staff of the Office of the

Secretariat at the Commission headquarters in accordance with 17 CFR

145.7 and 145.8.

Issued in Washington, DC, on November 18, 1997.

Alan L. Seifert,

Deputy Director.

[FR Doc. 97-30806 Filed 11-21-97; 8:45 am]

BILLING CODE 6351-01-M