Cantor Financial Futures Exchange's Proposal To Adopt Block Trading Procedures

COMMODITY FUTURES TRADING COMMISSION

Cantor Financial Futures Exchange's Proposal To Adopt Block

Trading Procedures

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of proposed new rules and rule amendments of the Cantor

Financial Futures Exchange to establish block trading procedures and

request for comment.

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SUMMARY: The New York Board of Trade, on behalf of the Cantor Financial

Futures Exchange, Inc. (``CX'' or ``Exchange''), has submitted proposed

new rules and rule amendments to the Commission that would establish

block trading procedures at CX. Under these procedures, qualified

market participants would be allowed to negotiate and arrange futures

transactions of a minimum size bilaterally away from the centralized,

competitive market. Once the specific terms of the block transaction

had been agreed to, the counterparties would report the relevant

details of the transaction to the Exchange for clearing and settlement.

CX's proposal is the first contract market proposal that the Commission

has received that would allow block trading.

Acting pursuant to the authority delegated by Commission Regulation

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

determined to publish CX's proposal for public comment. The Division

believes that publication of the proposal is in the public interest and

will assist the Commission in considering the views of interested

persons.

DATES: Comments must be received on or before October 22, 1999.

ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary,

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

Street, NW, Washington, DC 20581. Comments also may be sent by

facsimile to (202) 418-5221 or by electronic mail to

[email protected]. Reference should be made to the ``Cantor Financial

Future Exchange's Proposal to Adopt Block Trading Procedures.''

FOR FURTHER INFORMATION CONTACT:

David P. Van Wagner, Associate Director, Division of Trading and

Markets, Commodity Futures Trading Commission, Three Lafayette Centre,

1155 21st Street, NW, Washington, DC 20581. Telephone (202) 418-5430.

SUPPLEMENTARY INFORMATION:

I. Background

On June 4, 1999, the Commodity Futures Trading Commission issued an

Advisory on Alternative Execution, or Block Trading, Procedures for the

Futures Industry.\1\ Through this Advisory, the Commission announced

its intention to consider contract market proposals to adopt

alternative execution, or block trading, procedures for large size or

other types of orders on a case-by-case basis under a flexible approach

to the requirements of the Commodity Exchange Act (``Act'') and the

Commission's regulations. Under this approach, each contract market

retains the discretion to permit alternative execution procedures and

has the ability to develop procedures that reflect the particular

characteristics and needs of its individual markets and market

participants.

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\1\ 64 FR 31195 (June 10, 1999); 64 FR 34851 (corrections). The

Commission first raised the subject of alternative execution, or

block trading, procedures in its Concept Release on the Regulation

of Noncompetitive Transactions Executed on or Subject to the Rules

of a Contract Market. 63 FR 3708 (January 26, 1998). Through the

Concept Release, the Commission wished to explore whether certain

alternative execution procedures for large size or other types of

orders could be developed to satisfy the needs of market

participants while furthering the policies and purposes of the

Commodity Exchange Act and the Commission's Regulations.

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After the issuance of the Advisory, the New York Board of Trade, on

behalf of CX, submitted proposed new CX Rules 4-A and 305-A and

proposed amendments to CX Rules 300, 302, and 306 to the Commission

pursuant to Section 5a(a)(12)(A) of the Act and Commission Regulation

1.41(c).\2\ The proposed new rules and rule amendments would establish

block trading procedures at CX. Under these procedures, qualified

market participants would be allowed to negotiate and arrange futures

transactions of a minimum size bilaterally away from the centralized,

competitive market. Once the specific terms of the block transaction

had been agreed to, the counterparties would report the relevant

details of the transaction to CX for clearing and settlement. Thus,

under the proposed procedures, certain futures transactions could be

executed noncompetitively rather than through CX's electronic order-

matching system.

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\2\ See Letter from Ms. Audrey R. Hirschfeld, Senior Vice

President and General Counsel, New York Board of Trade to Ms. Jean

A. Webb, Secretary, Commodity Futures Trading Commission, dated

September 15, 1999.

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II. Description of the Proposed Block Trading Procedures

A. Eligible Contracts and Market Participants

Under the proposed procedures, block trading would be permitted in

any contract that has been designated by CX for such purpose. CX is

seeking to permit block trading in those contracts for which it has

been designated as a contract market by the Commission.\3\ CX's

proposal also would restrict block trading to those market participants

that qualify as an ``eligible participant'' as that term is defined by

Commission Regulation 36.1(c)(2). However, a commodity trading advisor

registered under Act (including without limitation any investment

advisor registered as such with the Securities and Exchange Commission

that is exempt from regulation under the Act or the Commission's

regulations) with total assets under management exceeding $50 million

may enter into block

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transactions on behalf of customers without these customers having to

qualify as ``eligible participants'' under Commission Regulation

36.1(c)(2).

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\3\ Such contracts include: (1) U.S. Treasury Bond futures; (2)

U.S. Treasury Ten-Year Note futures; (3) U.S. Treasury Five-Year

Note futures; and (4) U.S. Treasury Two-Year Note futures.

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A ``Clearing Member,'' ``Screen Based Trader,'' or ``Foreign Screen

Based Trader,'' as these terms are defined in CX's rules, would be able

to enter into block transactions either on a proprietary basis or, if

otherwise permitted, on behalf of customers or other third parties.

These entities (or any of their affiliates) would be eligible to

execute block transactions on a proprietary basis only if they were

``Primary Market Makers'' in the relevant contract market.\4\ In

addition, only Primary Market Makers would be allowed to make markets

in block trades. Block transactions executed directly between two

Primary Market Makers, or between a Primary Market Maker represented by

an agent and another Primary Market Maker would be prohibited.

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\4\ In connection with its block trading procedures, CX would

create a new class of market makers called ``Primary Market

Makers.'' Subject to the terms and conditions of the market making

agreement entered into the CX, a Primary Market Maker would be

obligated to make markets in the underlying contract market

throughout the trading session except for short intervals.

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B. Size and Price Requirements

Each buy or sell order underlying a block trade must authorize its

execution through CX's proposed block trading procedures and must be

for at least 50 contracts.\5\ This minimum size requirement would

increase once the average monthly trading volume on CX with respect to

the relevant contract reached certain thresholds for three consecutive

months. Specifically,the minimum size would increase to 75, 100, 200,

and 250 contracts once the average monthly trading volume on CX

exceeded 25,000, 50,000, 100,000, and 150,000 contracts, respectively,

for three consecutive months with respect to the relevant contract.\6\

The price of a block trade must be ``fair and reasonable'' in light of:

(1) The size of such block trade; and (2) the price and size of other

trades in the same contract at the relevant time.

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\5\ Generally, under CX's proposed block trading procedures,

orders from different accounts may not be aggregated to satisfy the

minimum size requirement. However, a commodity trading advisor

registered under the Act (including without limitation any

investment advisor registered as such with the Securities and

Exchange Commission that is exempt from regulation under the Act of

the Commission's regulations) with total assets under management

exceeding $50 million may aggregate orders from different accounts

to satisfy the minimum size requirement.

\6\ Since the inception of CX trading in September 1998, none of

CX's four Treasury securities futures contracts have ever averaged a

monthly trading volume in excess of 25,000 contracts. In the three-

month period from June to August 1999, CX's Treasury bond futures

contract, the Exchange's highest volume contract, had an average

monthly trading volume of 15,383 contracts.

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C. Transparency

Each block trade executed in accordance with CX's proposed block

trading procedures must be cleared through Clearing Members of the

Exchange. Information identifying the relevant contract, contract

month, price, quantity, time of execution and counterparty Clearing

Member for each block trade must be reported to CX within ten minutes

immediately following its execution. In the case of a block trade that

is executed during the last ten minutes of the trading session on any

given day or after the trading session has closed, the details of such

a block trade must be reported to CX prior to the opening of business

on the next succeeding day. CX will publicize information identifying

the relevant contract, contract month, price and quantity for each

block trade promptly after such information has been reported to CX.

III. Request for Comment

The Commission requests comment from interested persons concerning

any aspect of CX's proposed block trading procedures.

Copies of CX's proposed new rules and 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.

Issued in Washington, DC, on September 30, 1999.

Alan L. Seifert,

Deputy Director.

[FR Doc. 99-26121 Filed 10-6-99; 8:45 am]

BILLING CODE 6351-01-M