Application of Cantor Financial Futures Exchange as a Contract Market in U.S. Treasury Bond, Ten-Year Note, Five-Year Note and Two- Year Note Futures Contracts

COMMODITY FUTURES TRADING COMMISSION

Application of Cantor Financial Futures Exchange as a Contract

Market in U.S. Treasury Bond, Ten-Year Note, Five-Year Note and Two-

Year Note Futures Contracts

AGENCY: Commodity Futures Trading Commission.

ACTION: Application of the Cantor Financial Futures Exchange for

initial designation as a contract market.

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

SUMMARY: The Cantor Financial Futures Exchange, Inc. (``CFFE'' or

``Exchange''), a New York not-for-profit corporation, has applied for

designation as a contract market for the computer-based trading of US

Treasury bond, ten-year note, five-year note and two-year note futures

contracts. CFFE has been formed pursuant to an agreement between the

New York Cotton Exchange (``NYCE'') and CFFE, LLC, a subsidiary of

Cantor Fitzgerald, LP (``Cantor'').1 Under the agreement,

CFFE trading would be conducted on the same trading system that another

Cantor subsidiary, Cantor

[[Page 35913]]

Fitzgerald Securities, LLC (``CFS''), currently operates as an

interdealer-broker in the US Treasury securities market. CFFE's

regulatory responsibilities would be handled by NYCE. CFFE has not

previously been approved by the Commission as a contract market in any

commodity. Accordingly, in addition to the terms and conditions of the

proposed futures contracts, the Exchange has submitted to the

Commission a proposed trade-matching algorithm; proposed rules

pertaining to CFFE governance, disciplinary and arbitration procedures,

trading standards and recordkeeping requirements; and various other

materials to meet the requirements for a board of trade seeking initial

designation as a contract market. CFFE trades would be cleared and

settled by the Commodity Clearing Corporation (``CCC'') which is wholly

owned by NYCE. Notice of CFFE's application was previously published on

February 3, 1997 (63 FR 5505) for a comment period ending on April 6,

1998. That comment period was later extended until April 27, 1998 (63

FR 17823 (April 10, 1998)). Since the Commission's original publication

of the CFFE's proposal, the Exchange has made additional submissions to

the Commission. Those submissions revise a number of features of CFFE's

proposal and generally include further explication and supporting

materials with respect to the entire proposal. The submissions are

available for review in the Commission's public files.

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

\1\ CFFE, LLC is a limited liability company whose equity

interest is held by Cantor (ninety-nine percent) and CFFE Holdings,

LLC (one percent).

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

Acting pursuant to the authority delegated by Commission Regulation

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

determined to publish CFFE's proposal again so that the public may

review and comment on the Exchange's additional submissions. 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 with the

purposes of the Commodity Exchange Act. The Division seeks comment

regarding all aspects of CFFE's application and addressing any issues

commenters believe the Commission should consider.

DATES: Comments must be received on or before July 16, 1998.

FOR FURTHER INFORMATION CONTACT: With respect to questions about the

terms and conditions of CFFE's proposed futures contracts, please

contact Thomas M. Leahy of the Division of Economic Analysis, Commodity

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

Street, NW, Washington, DC 20581; Telephone number: (202) 418-5278;

Facsimile number: (202) 418-5527; or Electronic mail: [email protected].

With respect to questions about any of CFFE's other proposed rules or

related NYCE proposed rules, please contact David Van Wagner of the

Division of Trading and Markets at the same address; Telephone number:

(202) 418-5481; Facsimile number: (202) 418-5536; or Electronic mail:

[email protected].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

CFFE has applied for designation as a contract market for the

computer-based trading of US Treasury bond, ten-year note, five-year

note and two-year note futures contracts. CFFE 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

contracts, the Exchange has submitted, among other things, proposed

trade-matching algorithm procedures and rules pertaining to CFFE

governance, trade practice surveillance, disciplinary and arbitration

procedures, trading standards and recordkeeping requirements.

CFFE would be wholly owned by CFFE Regulatory Services, LLC. Equity

interest in CFFE Regulatory Services, LLC would be held entirely by

NYCE (ten percent equity interest) and NYCE's members (ninety percent

equity interest).\2\ CFFE's contracts would trade over a computer-based

trading system maintained by CFS (the ``Cantor System''). CFS is an

interdealer-broker in the US Treasury securities market, and it

currently operates the Cantor System to match orders placed with it by

broker-dealers and other customers. Although neither Cantor nor any of

its affiliates would have any equity interest in CFFE, Cantor would

collect a transaction fee for each trade executed at CFFE through the

Cantor System.

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

\2\ NYCE would have the sole voting interest in CFFE Regulatory

Services, LLC.

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

CFFE would be governed by a thirteen-person Board of Directors--

eight of whom would be appointed by Cantor and five of whom would be

appointed by NYCE. Three of the eight CFFE directors appointed by

Cantor would be public directors who could not be affiliated with the

CFFE, NYCE or Cantor. NYCE would be responsible for providing all of

CFFE's regulatory services including its compliance, surveillance,

arbitration and disciplinary programs.\3\ Because of NYCE's involvement

in CFFE's regulatory programs, all CFFE rule changes that involved

regulatory procedures would have to be approved by NYCE's Board of

Managers in addition to CFFE's Board of Directors.

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

\3\ In this regard, CFFE's proposed rules would incorporate by

reference certain NYCE rules, such as its rules governing

arbitration and disciplinary procedures.

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

CFFE proposes to trade each of its four contracts from 7:30 a.m. to

5:30 p.m., New York time, on each business day. Under the proposal, all

CFFE trading would be conducted through: (1) CFFE Class B Members

(i.e., NYCE members), (2) CFFE Associate Members, or (3) futures

commission merchants, introducing brokers and commodity trading

advisors, without CFFE membership, who have entered into a guarantee

agreement with a CCC clearing member to clear their CFFE trades. These

persons and entities would be collectively referred to as Screen-Based

Traders (``SBT'') under CFFE's rules. SBTs or their associated persons,

referred to as Authorized Traders (``AT'') under CFFE's rules, would

place orders, whether for their own or for their customers' accounts if

they are properly registered, by phoning CFFE terminal operators

(``TO'') \4\ located at a Cantor facility.\5\ For each order, the SBT

or Authorized Trader who placed an order would be required to provide

the TO with a customer or proprietary account identifier, the relevant

contract and the quantity and price.\6\ The CFFE TO would promptly

enter this information into the Cantor System via a terminal keyboard.

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

\4\ All CFFE TOs would be compensated by CFS.

\5\ All phone conversations between SBTs or ATs and CFFE TOs

would be recorded and time-indexed by a Cantor tape-recording

system. CFFE proposes to retain those recordings for a 45-day

period.

\6\ SBTs and ATs also would be required to fill out an order

ticket for each customer order.

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

The Cantor System would match eligible CFFE orders according to a

trade-matching algorithm that would be similar to the algorithm that

CFS currently uses to match orders as an interdealer-broker in the US

Treasury securities market. Under the algorithm, the Cantor System

would post the best bid (best offer) available at any given time and

its quantity. Any inferior bids (offers) that were posted earlier would

be removed from the System, while inferior bids (offers) entered

subsequently would be rejected by the System. Responsive orders to hit

outstanding bids (or take outstanding offers) would be matched with

bids (offers) on a time-priority basis at the designated bid (offer)

price. Under

[[Page 35914]]

CFFE's rules, accounts that placed such responsive orders would be

known as ``aggressors.'' Aggressors who placed orders that hit all

outstanding bids (take all outstanding offers) in the Cantor System at

any particular time would be permitted to engage in an exclusive

trading period with the best bidder (offeror). During this exclusive

trading period, the aggressor and the best bidder (offeror) would

``work up'' the quantity for a trade at the previously-established

trade price. During this work up process, each party would be given

alternating six-second periods either to agree to do a transaction at

the quantity offered by the other party or to counteroffer for some

other quantity. This work up process would continue until the parties

agreed to a transaction quantity.\7\ During an exclusive trading

period, the Cantor System would accept subsequent bids and offers at

the same price as the ongoing trade, and these orders would be matched

on a time-priority basis to the extent possible immediately upon the

conclusion of the exclusive period. The CFFE would provide an exclusive

trading period to participants who were earliest in posting best market

bids and offers and to aggressors in order to create an incentive for

participants to place orders at attractive prices and to provide

liquidity.

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

\7\ The entire work up process would be conducted through CFFE

TOs who would enter each party's desired quantity into the Cantor

System. The System itself would automatically trigger the

alternating six-second exclusive period for each party.

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

Upon the execution of a CFFE transaction, the TO would provide an

oral confirmation of the trade to the submitting SBT or AT by telephone

and the SBT or AT would record the details of the trade on an order

ticket.\8\ Upon execution of a trade, the Cantor System also would

electronically transmit matched-trade data to CCC for clearing and

settlement purposes. For each trade, CCC would transmit transaction

information to the appropriate clearing members via the Trade Input

Processing System (``TIPS'').\9\ Clearing members would be required to

accept or reject each trade within thirty minutes of its posting on

TIPS.

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

\8\ TOs would receive and input orders from SBTs and ATs and

relay back trade confirmations. TOs could not maintain any sort of

order book or deck, nor could they exercise any discretion over

orders.

\9\ CCC estimates that CFFE trades would be posted on TIPS

within fifteen minutes of their execution.

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

The Cantor System also would transmit relevant trade data to NYCE

each day for compliance and surveillance purposes.

Since the Commission's original publication of the CFFE's proposal

for comment, the Exchange has revised a number of aspects of its

proposal. Among the revisions, the CFFE has provided an extensive

explanation of its TOs' responsibilities and restrictions and has

stated that it would register all TOs with the Commission as floor

brokers. The Exchange also has created a new membership category--

Associate Members--and has clarified that all holders of CFFE trading

privileges who could execute customer orders would be Commission

registrants. In addition, all trading privilege holders would, under

CFFE's rules, be subjected to the Commission's Part 155 trading

standards. The Exchange also has provided further explanation and

justification of its trade-matching algorithm, including the procedures

for exclusive trading periods and market-crossing sessions.

Finally, among the more significant additions to its submission,

the CFFE has determined that the CCC, rather than the New York Board of

Clearing, would clear and settle Exchange transactions. It also has

submitted an extensive description of CFFE's compliance and

surveillance programs and the role of NYCE staff in administering these

programs.

III. Request for Comments

Any person interested in submitting written data, views, or

arguments on the proposal to designate CFFE 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 CFFE's application for designation as a new contract

market, as well as CCC's proposal to serve as CFFE's clearing

organization. Reference should be made to the CFFE application for

designation as a contract market in US Treasury bond, ten-year note,

five-year note and two-year note futures contracts. Copies of the

proposed terms and conditions 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.

Other materials submitted by CFFE and CCC may be available upon

request pursuant to the Freedom of Information Act (5 U.S.C. 552),

except to the extent that they are entitled to confidential treatment

pursuant to 17 CFR 145.5 or 145.9. Requests for copies of such

materials should be made to the Freedom of Information, 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 June 25, 1998.

Alan L. Seifert,

Deputy Director.

[FR Doc. 98-17501 Filed 6-30-98; 8:45 am]

BILLING CODE 6351-01-U