Chicago Mercantile Exchange: Proposal To List Additional Contract Months in the CME Russian Ruble Futures Contract

COMMODITY FUTURES TRADING COMMISSION

Chicago Mercantile Exchange: Proposal To List Additional Contract

Months in the CME Russian Ruble Futures Contract

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of availability of proposal to list new months in a

commodity futures contract.

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

submitted a proposal to list additional contract months in the CME

Russian Ruble Futures Contract. Under the proposal, the CME would, as

is the case with the currently listed June 1999 contract month, base

the cash settlement price on two surveys performed by the CME clearing

house at random times on the last day of trading.

The Acting Director of the Division of Economic Analysis

(Division), acting pursuant to the authority delegated by Commission

Regulation 140.96, has determined that publication of the proposal for

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

considering the views of interested persons, and is consistent with the

purpose of the Commodity Exchange Act.

DATES: Comments must be received on or before June 7, 1999.

ADDRESSES: Interested persons should submit their views and comments 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].

Reference should be made to the proposal to list additional contract

months in the CME Russian Ruble futures contract.

FOR FURTHER INFORMATION CONTACT: Please contact Michael Penick of the

Division of Economic Analysis, Commodity Futures Trading Commission,

Three Lafayette Centre, 1155 21st Street NW, Washington, DC 20581,

telephone (202) 418-5279. Facsimile number: (202) 418-5527. Electronic

mail: [email protected].

SUPPLEMENTARY INFORMATION: On October 6, 1998, the Commission approved

the suspension of listing of new contract months in the Russian ruble

futures contract. In a letter to the CME dated December 9, 1998, the

Commission approved proposed amendments to the cash settlement

procedure of the Russian ruble futures contract and notified the CME

that it was approving those proposed amendments for application to

existing contract months only. The Commission also notified the CME in

that letter that the CME must submit any proposal to list additional

contract months pursuant to Commission Regulation 1.41(b) rather than

the expedited procedure of Regulation 1.41(l).\1\

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\1\ Commission Regulation 1.41(l) provides that an exchange

proposal to list additional contract months in a futures or option

contract will be deemed approved 10 days after receipt by the

Commission if it does not provide for the listing of a contract

month outside the currently established cycle of contract months.

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Under the CME's current cash settlement procedure, as approved by

the Commission on December 9, 1998 for months listed through June 1999,

the CME performs two surveys of financial institutions at randomly

selected times during MICEX's afternoon System for Electronic Trading

(SELT) session for transactions between commercial banks (currently

conducted between 12 noon and 4:30 p.m. Moscow time) on each Moscow

business day.\2\ The final settlement price is the reciprocal of the

average of the two rubles-per-dollar exchange rates calculated from the

two surveys on the last trading day.

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\2\ MICEX currently runs two daily trading sessions--a morning

session for importers and exporters and an afternoon session for

transactions between commercial banks.

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During each survey, the CME asks participants for two separate

rubles per dollar exchange rates as well as an overnight interbank

ruble interest rate. Those two rubles per dollar exchange rates are a

``today rate'' (the exchange rate for same-day settlement) and a

``tomorrow rate'' (the exchange rate for settlement on the next Moscow

business day).\3\ In its calculation of the final settlement price, the

CME uses the today rate from each participant that provides a today

rate. If any participant provides a tomorrow rate and overnight

interest rate, but not a today rate, the CME calculates an ``implied

today rate'' for such participants. The implied today rate is

calculated using the interest rate parity relation based on the

tomorrow rate, the overnight ruble interest rate, and the federal funds

overnight U.S. dollar interest rate.\4\ Thus, the result of any single

survey (and, thus, the cash settlement price) could consist of a

mixture of actual and implied today rates. In practice, given that

trading for same day settlement is not permitted in the MICEX afternoon

session, past cash settlement prices based on this procedure have

consisted entirely of implied today rates.

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\3\ At the afternoon MICEX session, trading is currently allowed

only for settlement on the next Moscow business day.

\4\ In this case, the tomorrow rate and overnight ruble interest

rate used are average rates calculated from the daily survey

results. The overnight federal funds rate is obtained from Telerate.

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In the event that the CME is unable to complete both daily surveys

on the last trading day, the CME calculates the final settlement price

based on two surveys, performed under the same procedures, conducted on

the Moscow business day following the last trading day. If the CME is

also unable to complete two surveys on the second day, then the final

settlement price is based on the survey results from the most recent

business day prior to the last trading day on which two surveys were

successfully completed.

The CME proposes to implement the proposal to list additional

contract months shortly after receipt of Commission approval. The CME

characterized the Russian ruble contract as ``an important hedging

mechanism'' and stated that, without additional contract months, the

``international marketplace will lose the premier tool for managing

Russian ruble vs. U.S. dollar price risk.'' The CME also affirmed that

any basis risk that may be associated with positions in the ruble

contract is less than the risk exposure that would be faced by hedgers

in the absence of the ruble contract, since there is no other viable

means to hedge ruble positions.

Moreover, with respect to susceptibility to manipulation, the CME

stated in its submission that since the events that occurred last

summer, ``the Russian economy has stabilized and is taking steps to

recovery.'' The CME noted that real consumer spending and industrial

production have increased, while monthly inflation rates have

decreased. In addition, the CME cited the Russian Finance Ministry

claim that

[[Page 27760]]

wage and pension arrears have been reduced and the government has paid

all federal wage arrears. Moreover, according to the CME, Russia has

reached agreements with the IMF and World Bank that would provide

Russia with access to additional loans and the ability to negotiate

with creditors to restructure existing debts. Further, Russia has

restructured most of its domestic debt which had been frozen in August

1998.

The CME further noted that its CME/EMTA reference rate survey is

widely accepted in the cash market. It was noted that the results of

the survey, which is conducted daily, has been accepted as a rate

source for non-deliverable forward Russian ruble-US Dollar

transactions. That rate also has been approved by the Emerging Markets

Traders Association, the Foreign Exchange Committee, and the

International Swaps Dealers Association for settlement of U.S. dollar/

Russian ruble transactions in the spot market. Thus, according to the

CME, the CME/EMTA reference rate has become the de facto price

discovery mechanism for the Russian ruble market. Moreover, the CME

noted that the CME/EMTA reference rate survey was used successfully to

cash settle the October, November, and December 1998 futures contracts

and the March 1999 futures contract. Moreover, on each of those cash

settlement days, at least eight survey participants provided quotes,

consistent with the CME's existing contract terms and conditions

regarding final cash settlement survey.

The Division requests comment on the proposal to list additional

contract months. The Division specifically requests comment on whether

the survey procedure has resulted, and will continue to result, in a

cash settlement price that is reflective of the underlying cash market

and otherwise meets the standards of the Commission's Guideline No.

1.\5\ In that regard, the Division notes that the CME survey procedure

is designed to obtain an exchange rate for same-day settlement during

the afternoon MICEX session but that trading for same-day settlement is

not currently permitted during that MICEX session. In its December 9,

1998 letter to the CME, the Commission approved the use of a today rate

to settle existing contract months, in part because there were

indications that futures prices in those contract months were based on

traders' expectations that the cash settlement price ultimately would

be based on a today rate. The Division now requests comment on the

appropriateness of using an implied today rate for newly listed months.

The Division also requests comment on whether the CME procedure will

continue to result in a cash settlement price that is not readily

susceptible to manipulation or distortion in light of the degree of

liquidity of the Russian ruble market and the restrictions on currency

trading in Russia. Specifically, will the procedures used by the CME,

including setting the cash settlement price based on two surveys

conducted at random times, tend to prevent market participants from

influencing the cash settlement price? Finally, in the current

environment and given the proposed cash settlement provisions, can the

Russian ruble contract be used for hedging or price discovery?

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\5\ The Commission's Guideline No. 1 (17 CFR part 5, Appendix A,

section (a)(2)(iii)) requires, for cash settled contracts, that the

cash price series must be reflective of the underlying cash market

and be reliable, acceptable, publicly available, and timely and not

readily susceptible to manipulation.

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The proposal was submitted to the Commission under the Commission's

45-day Fast Track procedures of Commission Regulation 1.41(b)(2). In

view of the limited review period under the Fast Track procedures, the

Division has determined to publish for public comment notice of the

proposal for 15 days, rather than 30 days as provided for proposals

submitted under the regular review procedures.

Copies of the proposal will be available for inspection at the

Office of the Secretariat, Commodity Futures Trading Commission, Three

Lafayette Centre, 1155 21st St., NW, Washington, DC 20581. Copies of

the proposal can be obtained through the Office of the Secretariat by

mail at the above address or by phone at (202) 418-5100.

Other materials submitted by the CME may be available upon request

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

Commission's regulations thereunder (17 CFR part 145 (1987)), except to

the extent they are entitled to confidential treatment as set forth in

17 CFR 145.5 and 145.9. Requests for 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's headquarters in

accordance with 17 CFR 145.7 and 145.8.

Any person interested in submitting written data, views, or

arguments on the proposal, or with respect to other materials submitted

by the CME, should send such comments to Jean A. Webb, Secretary,

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

St., NW, Washington, DC 20581 by the specified date.

Issued in Washington, DC, on May 17, 1999.

John R. Mielke,

Acting Director.

[FR Doc. 99-12879 Filed 5-20-99; 8:45; am]

BILLING CODE 6351-01-M