Self-Regulatory Organization; Chicago Mercantile Exchange; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change and Amendment No. 1 Thereto Relating to Rules Governing Contract Specifications for Physically Delivered Single Security Futures, 39820-39826 [E5-3618]
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Federal Register / Vol. 70, No. 131 / Monday, July 11, 2005 / Notices
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
Self-Regulatory Organization; Chicago
Mercantile Exchange; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change and
Amendment No. 1 Thereto Relating to
Rules Governing Contract
Specifications for Physically Delivered
Single Security Futures
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CME–2005–02 on the
subject line.
[Release No. 34–51957; File No. SR–CME–
2005–03]
June 30, 2005.
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–7 thereunder,2
• Send paper comments in triplicate
notice is hereby given that on May 4,
to Jonathan G. Katz, Secretary,
2005, the Chicago Mercantile Exchange
Securities and Exchange Commission,
(‘‘CME’’ or ‘‘Exchange’’) filed with the
Station Place, 100 F Street, NE.,
Securities and Exchange Commission
Washington, DC 20549–9303.
(‘‘Commission’’) the proposed rule
All submissions should refer to File
change described in Items I, II, and III
Number SR–CME–2005–02. This file
below, which Items have been prepared
number should be included on the
by the Exchange. On May 31, 2005, CME
subject line if e-mail is used. To help the filed Amendment No. 1 to the proposed
Commission process and review your
rule change.3 The Commission is
comments more efficiently, please use
publishing this notice, as amended, to
only one method. The Commission will solicit comments on the proposed rule
post all comments on the Commission’s change from interested persons.
Internet Web site (https://www.sec.gov/
CME has also certified the proposed
rules/sro.shtml). Copies of the
rule change with the Commodity
submission, all subsequent
Futures Trading Commission (‘‘CFTC’’)
amendments, all written statements
under Section 5c(c) of the Commodity
with respect to the proposed rule
Exchange Act (‘‘CEA’’) 4 on May 4, 2005.
change that are filed with the
I. Self-Regulatory Organization’s
Commission, and all written
Statement of the Terms of Substance of
communications relating to the
the Proposed Rule Change
proposed rule change between the
Commission and any person, other than
CME proposes to adopt rules
those that may be withheld from the
governing the trade of physically
delivered single security futures
public in accordance with the
products (‘‘SFPs’’). Further, the
provisions of 5 U.S.C. 552, will be
Exchange hereby certifies the listing of
available for inspection and copying in
futures on Exchange Traded Funds
the Commission’s Public Reference
(‘‘ETFs’’), specifically, the Nasdaq-100
Section. Copies of such filing also will
Tracking Stock SM (‘‘QQQQ’’), Standard
be available for inspection and copying
& Poor’s Depositary Receipts
at the principal office of CME. All
(‘‘SPDR’’), and IWM.5 The Exchange
comments received will be posted
without change; the Commission does
1 15 U.S.C. 78s(b)(7).
not edit personal identifying
2 17 CFR 240.19b–7.
information from submissions. You
3 See letter from John W. Labuszewski, Managing
should submit only information that
Director, CME, to Florence E. Harmon, Senior
you wish to make available publicly. All Special Counsel, Division of Market Regulation
submissions should refer to File
(‘‘Division’’), Commission, on May 31, 2005.
(‘‘Amendment No. 1’’). In Amendment No. 1, the
Number SR–CME–2005–02 and should
Exchange proposes to amend the size of its iShares
be submitted on or before August 1,
Russell 2000 (‘‘IWM’’) futures contract to 200
2005.
instead of 100 shares. The Exchange believes that
Paper Comments
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.38
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–3617 Filed 7–8–05; 8:45 am]
BILLING CODE 8010–01–P
38 17
CFR 200.30–3(a)(12).
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this implies that the value of the $0.01 minimum
price fluctuation shall be $2.00 instead of $1.00.
Also, the Exchange proposes to amend the launch
date for IWM futures to June 20, 2005 from June 6,
2005.
4 7 U.S.C. 7a–2(c).
5 The Exchange proposes to make the proposed
rule change effective on June 6, 2005 when it
intends to list for trading futures based on SPDRs
and QQQQs. The Exchange proposes to list futures
based on IWMs on June 20, 2005. See Amendment
No. 1, supra note 3.
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believes that these contract
specifications are substantially similar
to contract specifications currently in
use with respect to physically delivered
single security futures traded elsewhere.
Proposed new language is italicized.
CHAPTER 710: PHYSICALLY
DELIVERED SINGLE SECURITY
FUTURES
71000. SCOPE OF CHAPTER
This chapter is limited in application
to contract specifications applied to
security futures contracts that require
the physical delivery of a single security
(a ‘‘Physically Delivered Single Security
Futures’’). Single securities that are
eligible for listing per this Chapter 710
include those that meeting the initial
listing standards per Exchange Rule
70001 and the maintenance listing
standards per Exchange Rule 70002.
71001. FUTURES CALL
71001.A. Trading Unit
Physically Delivered Single Security
Futures contracts shall require the
delivery of a particular number of
shares, as specified per Rule 71004, of
common stock; an exchange traded
fund (‘‘ETF Share’’); a trust issued
receipt (‘‘TIR’’); a registered closed-end
management investment company
(‘‘Closed-End Fund Share’’); or,
American Depository Receipts (‘‘ADR’’).
71001.B. Price Increments
Physically Delivered Single Security
Futures contracts shall be traded in U.S.
Dollars with a minimum price
increment as determined by the Board
of Directors as depicted in Rule 71004.
71001.C. Trading Schedule
Physically Delivered Single Security
Futures contracts may be traded during
such hours, for delivery in such months
as determined by the Board of Directors.
71001.D. Termination of Trading
All trading in a particular Physically
Delivered Single Security Futures
contract shall terminate at the close of
business on the third Friday of the
contract month.
71001.E. Position Limits
Position limits shall be applied on
Physically Delivered Single Security
Futures contracts such that, during the
last five trading days of an expiring
contract month, a person shall not own
or control more than a specified number
of contracts net long or net short in the
expiring contract month, as depicted in
Exchange Rule 71004. Position limits for
each Physically Delivered Single
Security Futures contract shall be
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determined on a case-by-case basis at
levels no greater than those prescribed
by CFTC Regulation § 41.25(a)(3).
71001.F. Price Limits and Trading Halts
There is no daily price limit for
Physically Delivered Single Security
Futures contracts. Trading of Physically
Delivered Single Security Futures shall
be halted at all times that a regulatory
halt, as defined per SEC Rule 6h–1(a)(3)
and CFTC Regulation § 41.1(l), has been
instituted for the underlying security.
71002. SETTLEMENT PRICE
71002.A. Daily Settlement Price
Except for the last day of trading on
an expiring contract, daily settlement
prices shall be determined per Rule 813.
71002.B. Final Settlement Price
On the last day of trading for an
expiring contract, the Final Settlement
Price is determined in accordance with
Rule 71002.A. unless the Final
Settlement Price is fixed in accordance
with Rule 70120.
71003. DELIVERY
Three (3) business days after the last
trading day for an expiring contract, the
National Securities Clearing
Corporation and Depository Trust
Corporation will facilitate delivery of,
and payment for, the underlying
common stock, American Depository
Receipts, shares of exchange-traded
funds, shares of closed-end
management investment companies, or
trust issued receipts whereby: a seller
(i.e., the holder of a net short position)
delivers the securities underlying the
contract to a respective buyer (i.e., the
holder of a net long position); and, in
exchange, that buyer pays his respective
seller the aggregate dollar amount of the
Expiration Day Settlement Price
multiplied by the quantity of the
underlying securities delivered.6
71004. APPROVED SECURITIES
The following securities have been
approved by the Board of Directors as
the subject of Physically Delivered
Single Security Futures Contracts:
Position limit in expiring contract in last
5 trading days
Approved security
Unit of trading
Minimum fluctuation
Nasdaq-100 Tracking StockSM (‘‘QQQQ’’) ...........
Standard & Poor’s Depositary Receipts
(‘‘SPDR’’).
iShares Russell 2000 ( ‘‘IWM’’) ............................
200 shares ............
100 shares ............
$0.01 or $2.00 per contract .................................
$0.01 or $1.00 per contract .................................
11,250
22,500
200 shares ............
$0.01 or $2.00 per contract .................................
7 11,250
7 Trading in physically settled futures on IWMs did not qualify for the 22,500 position limit pursuant to CFTC Regulation § 41.25(a)(3)(i)(A) prior
to the 2-for-1 split with an ex-date of June 9, 2005. However, after the split, futures based on IWMs do qualify for a net position limit no greater
than 22,500 (100 share contract) pursuant to this CFTC Regulation. To the extent that CME amended the IWM contract size from the originally
proposed 100 share contract to 200 share contract as a result of the split, the applicable position limit for futures on IWM contracts pursuant to
CFTC Regulation § 41.25 would be 11,250. Telephone conversation between John Labuszewski, Managing Director, CME, and Florence E. Harmon, Senior Special Counsel, Division, Commission, on June 28, 2005.
BASED UPON OR DERIVED FROM
ANY RUSSELL INDEX. FRANK
RUSSELL COMPANY IS NOT THE
ISSUER OF ANY SUCH SECURITIES
OR OTHER FINANCIAL PRODUCTS
AND MAKES NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY
OR FITNESS FOR ANY PARTICULAR
PURPOSE WITH RESPECT TO ANY
RUSSELL INDEX OR ANY DATA
INCLUDED OR REFLECTED THEREIN,
NOR AS TO RESULTS TO BE
OBTAINED BY ANY PERSON OR ANY
ENTITY FROM THE USE OF THE
RUSSELL INDEX OR ANY DATA
INCLUDED OR REFLECTED THEREIN.
Standard & Poor’s, a division of The
McGraw-Hill Companies, Inc. (‘‘S&P’’),
does not guarantee the accuracy and/or
completeness of the S&P Stock Indices
or any data included therein. S&P
makes no warranty, express or implied,
as to the results to be obtained by any
person or any entity from the use of the
S&P Index ETFs or any data included
therein in connection with the trading of
futures contracts, options on futures
contracts or any other use. S&P makes
no express or implied warranties, and
expressly disclaims all warranties of
merchantability or fitness for a
particular purpose or use with respect to
the S&P Index ETFs or any data
included therein. Without limiting any
of the foregoing, in no event shall S&P
have any liability for any special,
punitive, indirect, or consequential
damages (including lost profits), even if
notified of the possibility of such
damages.
NEITHER FRANK RUSSELL
COMPANY’S PUBLICATION OF THE
RUSSELL INDEXES NOR ITS
LICENSING OF ITS TRADEMARKS FOR
USE IN CONNECTION WITH
SECURITIES OR OTHER FINANCIAL
PRODUCTS DERIVED FROM A
RUSSELL INDEX IN ANY WAY
SUGGESTS OR IMPLIES A
REPRESENTATION OR OPINION BY
FRANK RUSSELL COMPANY AS TO
THE ATTRACTIVENESS OF
INVESTMENT IN ANY SECURITIES OR
OTHER FINANCIAL PRODUCTS
6 The Exchange has clarified that Depository
Trust Corporation will facilitate delivery of, and
payment for, the underlying common stock,
American Depository Receipts, shares of exchange-
traded funds, shares of closed-end management
investment companies, or trust issued receipts via
a participant of DTC with whom CME has a
dedicated account. Telephone conversation
between John Labuszewski, Managing Director,
CME, and Florence E. Harmon, Senior Special
Counsel, Division, Commission, on June 9, 2005.
71005. EMERGENCIES, ACTS OF GOD,
ACTS OF GOVERNMENT
If delivery or acceptance or any
precondition or requirement of either is
prevented by a strike, fire, accident,
action of government or act of God, the
seller or buyer shall immediately notify
the Exchange President. If the President
determines that emergency action may
be necessary, he shall call a special
meeting of the Board of Directors and
arrange for the presentation of evidence
respecting the emergency condition. If
the Board determines that an emergency
condition exists, it shall take such
action as it deems necessary under the
circumstances and its decision shall be
binding upon all parties to the contract.
INTERPRETATIONS & SPECIAL
NOTICES RELATING TO CHAPTER 710
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change and discussed
any comments it received on the
proposed rule change, as amended. The
text of these statements may be
examined at the places specified in Item
IV below. The Exchange has prepared
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summaries, set forth in Sections A, B,
and C below, of the most significant
aspects or such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The Exchange proposes to adopt
contract specifications governing
physically delivered single security
futures. Further, the Exchange proposes
to list for trading, per such rules, futures
on ETFs, specifically, QQQQ, SPDR,
and IWM. The Exchange intends to offer
physically delivered single security
futures exclusively on CME’s GLOBEX
electronic trading platform as opposed
to trading on the floor of the Exchange.
Contract Size—CME Rule 71001.A.,
Trading Unit, specifies that ‘‘Physically
Delivered Single Security Futures
contracts shall require the delivery of a
particular number of shares, as specified
per CME Rule 71004, of common stock;
an exchange traded fund (‘ETF Share’);
a trust issued receipt (‘TIR’); a registered
closed-end management investment
company (‘Closed-End Fund Share’); or,
American Depository Receipts (‘ADR’).’’
CME Rule 71004, Approved Securities,
provides that futures based on SPDRs
shall be traded in units of 100 shares.
SPDRs closed at $117.96 on March 31,
2005. The Exchange believes that this
implies a contract valuation of $11,796.
However, the Exchange proposes to
trade QQQQs and IWMs based upon a
200-share unit. The Nasdaq-100
Tracking Stock closed at $36.57 on
March 31, 2005, which equates to a
contract value of $7,314. IWMs closed at
$124.24 on March 31, 2005 but are
scheduled to be split on a 2-for-1 basis
on June 9, 2005 which, the Exchange
believes, implies a post-split share value
of $62.12 or a contract value of $12,424
based upon a 200-share contract.
The Exchange believes that these
values are generally somewhat smaller
than the size of the E-mini S&P 500, Emini Russell 2000, and E-mini Nasdaq100. The Exchange further believes that
they are generally, with the exception of
QQQQs and IWMs, consistent with
practices in the context of other SFPs
and with ETF-based options traded on
stock option exchanges, which are
generally based upon a 100-share
trading unit.
Quotation Specification—CME Rule
71002.B., Price Increments, provides
that ‘‘Physically Delivered Single
Security Futures contracts shall be
traded in U.S. Dollars with a minimum
price increment as determined by the
Board of Directors as depicted in Rule
71004.’’ CME Rule 71004, Approved
Securities, provides that ETF futures
would be quoted in minimum
increments of $0.01 per share. The
Exchange believes that this equates to a
$1.00 tick in the context of SPDRs and
a $2.00 tick in QQQQs and IWMs. The
Exchange further believes that this
provision is not inconsistent with
provisions associated with other extant
SFPs or stock options based on ETFs.
Moreover, the Exchange believes that a
penny tick matches practices in the
underlying ETF markets.
Position Limits—CME Rule 71001.E.,
Position Limits, provides that
‘‘[p]osition limits shall be applied on
Physically Delivered Single Security
Futures contracts such that, during the
last five trading days of an expiring
contract month, a person shall not own
or control more than a specified number
of contracts net long or net short in the
expiring contract month, as depicted in
CME Rule 71004. Position limits for
each Physically Delivered Single
Security Futures contract shall be
determined on a case-by-case basis in
accordance with CFTC Regulation
§ 41.25(a)(3).’’ CME Rule 71004,
Approved Securities, provides that the
position limit applied to futures based
on QQQQs and IWMs during the last
five trading days of an expiring contract
month shall be 11,250 contracts and
22,500 contracts for SPDRs. The
Exchange represents that these figures
were determined by reference to CFTC
Regulation § 41.25(a)(3),8 which
prescribes appropriate position limits by
reference to the average daily volume
(ADV) in the security over the prior six
(6) months and the shares outstanding.
ADV
(10/04–3/05)
SPDRs .....................................................................................................................................
IWMs (pre-split) .......................................................................................................................
IWMs (post-split) ......................................................................................................................
QQQQs ....................................................................................................................................
51,890,256
8,022,330
16,044,660
98,137,035
Shares outstanding
(000)
425,860
40,950
81,900
520,900
(4/22/05)
(4/22/05)
(4/22/05)
(4/21/05)
The Exchange believes that the 11,250
contract limit adopted in the context of
IWMs and QQQQs is in conformance
with CFTC Regulation
§ 41.25(a)(3)(i)(A) 9 which specifies that
‘‘where the average daily trading
volume in the underlying security
exceeds 20 million shares, or exceeds 15
million shares and there are more than
40 million shares of the underlying
shares of the underlying security
outstanding, the designated contract
market * * * may adopt a net position
limit no greater than 22,500 (100-share)
contracts.’’ However, to the extent that
the Exchange proposes to adopt a 200share contract with respect to IWMs and
QQQQs, the 22,500 limit need be halved
to 11,250 contracts. Finally, the
Exchange believes that SPDRs likewise
exceed the parameters specified per
CFTC Regulation § 41.25(a)(3)(i)(A).10
Thus, the Exchange proposes to adopt a
22,500 limit, noting the proposed 100share contract size.
Trading Schedule—The CME Board
has determined that trading in futures
on the three ETFs mentioned above
shall be conducted from 8:30 a.m. to
3:15 p.m., Mondays through Fridays
(Chicago time), when the underlying
markets for the ETFs are open.11 The
CME Board has further determined
initially to list futures for delivery in the
first two quarterly delivery months in
the March, June, September, and
December cycle plus the first two nonquarterly or ‘‘serial’’ months (January,
February, April, May, July, August,
October, November) per CME Rule
71001.C., Trading Schedule.
8 17 CFR 41.25(a)(3). IWMs qualify for the 22,500
position limit on a post-split basis because the
trading volume and shares outstanding doubled due
to the 2-for-1 split on June 9, 2005. Because of the
split, the average daily trading volume is
considered doubled for the most recent six-month
period in compliance with CFTC Regulation
§ 41.25. Telephone conservation between John
Labuszewski, Managing Director, CME, and
Florence E. Harmon, Senior Special Counsel,
Division, Commission, on June 28, 2005.
9 17 CFR 41.25(a)(3)(i)(A).
10 17 CFR 41.25(a)(3)(i)(A).
11 CME confirmed that futures on the three ETFs
would not be traded during holidays and other
periods when the underlying markets for the ETFs
are not open. Telephone conversation between
Richard Co, Director of Financial Research, CME,
and Florence E. Harmon, Senior Special Counsel,
Division, Commission, on June 24, 2005.
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Federal Register / Vol. 70, No. 131 / Monday, July 11, 2005 / Notices
39823
SUMMARY TERMS AND CONDITIONS
Contract Size ......................................................
One-hundred (100) ETF shares of S&P 500 (SPDR); or two-hundred (200) shares of Nasdaq100 Tracking StockSM (QQQQ) or iShares Russell 2000 (IWM).
March Quarterly Cycle plus first two serial months.
Traded on the GLOBEX electronic trading platform from 8:30 am to 3:15 pm Mondays
through Fridays (Chicago times).
$0.01 or $1.00 per contract in context of SPDRs; $2.00 per contract in context of QQQQs and
IWMs.
Trading halts are coordinated with halts in the underlying ETFs.
11,250 contracts for QQQQs and IWMs and 22,500 contracts for SPDRs net long or short during the last five (5) trading days of an expiring contract.
Third Friday of the Contract Month.
Trades until the normal close of trading on the Final Settlement Date.
Final settlement is accomplished through delivery of the requisite number of ETF shares.
Contract Months .................................................
Trading Hours .....................................................
Minimum Price Fluctuation .................................
Trading Halts ......................................................
Position Limits .....................................................
Final Settlement Date .........................................
Last Trading Day ................................................
Final Settlement ..................................................
Trading Halts—CME Rule 71001.F.,
Price Limits and Trading Halts, provides
that there would be no daily price limit
for Physically Delivered Single Security
Futures contracts. However, trading of
Physically Delivered Single Security
Futures shall be halted at all times that
a regulatory halt, as defined in CFTC
Regulation 41.1(1),12 has been instituted
for the underlying security. The
Exchange believes that this provision is
consistent with the prescriptions of
CFTC Regulation § 41.25(a)(2)(i) 13 and
Rule 6h–1(a)(3) of the Act.14
Daily Settlement—Settlement prices
on a daily basis shall be established per
current Exchange practices as defined in
CME Rule 813, Settlement Price.
Final Settlement—Final settlement
would be accomplished through the
delivery of the underlying securities
against the expiring contract per the
provisions of CME Rule 71003, Delivery.
Specifically, CME Rule 71003 provides
that ‘‘[t]hree (3) business days after the
last trading day for an expiring contract,
the National Securities Clearing
Corporation (‘‘NSCC’’) and Depository
Trust Corporation (‘‘DTC’’) will
facilitate delivery of, and payment for,
the underlying * * * [security] * * *
whereby: A seller * * * delivers the
securities * * * and, in exchange, that
buyer pays his respective seller the
aggregate dollar amount of the
Expiration Day Settlement Price
multiplied by the quantity of the
underlying securities delivered.’’ 15 The
invoice amount would be established
per CME Rule 71002.B., Final
Settlement Price, as the closing price of
the futures contract established per
normal settlement procedures.16
Deliveries shall be facilitated through
the CME Clearing House and its
designated facilitating agents.
Compliance With Listing Standards—
Single securities eligible for listing per
these proposed rules would be governed
by Chapter 700 of the Exchange’s
Rulebook (‘‘Rulebook’’), which specifies
initial and maintenance listing
standards for physically delivered single
security futures and for security futures
based on an Index of two or more
securities.17 The Exchange believes that
Chapter 710 of the Rulebook governing
physically delivered single security
futures is based closely upon the
specifications under which single
security futures are traded elsewhere.
In order to attain initial eligibility for
listing, a security must comply with
certain requirements with respect to
activity and issue size as discussed
below. As illustrated in the
accompanying table, all three of the
subject securities meet the qualifications
for initial listing as specified above.
• Per CME Rule 70001.1., ‘‘[t]here
must be at least seven million shares or
receipts evidencing the underlying
security outstanding.’’
• Per CME Rule 70001.7, ‘‘it must
have had a total trading volume * * *
of at least 2,400,000 shares or receipts
evidencing the underlying security in
the preceding 12 months.’’
• Per CME Rule 70001.8, ‘‘the market
price per share of the underlying
security has been at least $3.00 for the
previous five consecutive business days
preceding the date on which the
Exchange commences to list and trade
the Security Futures Product on said
underlying security.’’ 18
Shares outstanding
(000)
SPDRs .........................................................................................................................
IWMs ............................................................................................................................
QQQQs ........................................................................................................................
425,860 (4/22/05)
40,950 (4/22/05)
520,900 (4/21/05)
Total volume
(4/04–3/05)
11,841,058,200
1,849,663,900
24,973,601,523
Price
(3/31/05)
$117.96
112.15
36.57
Section 6(h)(3) of the Act Requirements
12 17
CFR 41.1(1).
CFR 41.25(a)(2)(i).
14 17 CFR 240.6h–1(a)(3).
15 As described below, CME has reached an
agreement with a participant of DTC, a registered
clearing agency, to facilitate the delivery-versuspayment transactions that result from an agreement
to make or take delivery of the ETFs.
16 See Amendment No. 1, supra note 3.
17 Chapter 700 of the CME Rulebook has been
developed for purposes of compliance with Section
6(h) of the Act. CME believes that CME Listing
Standards are generally identical to the sample
listing standards published in the Commission’s,
13 17
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Division of Market Regulation Staff Legal Bulletin
No. 15, as supplemented by the Joint Order of the
Commission and CFTC identifying listing standards
for shares of ETFs, TIRs, and Closed-End Fund. See
Commission, Division: Staff Legal Bulletin No. 15:
Listing Standards for Trading Security Futures
Products (September 5, 2001). See also Securities
Exchange Act Release No. 46090 (June 19, 2002), 67
FR 42760 (June 25, 2002).
18 The joint order by the CFTC and the
Commission modifying the requirement specified in
Section 6(h)(3)(D) of the Act and the criterion
specified in Section 2(a)(1)(D)(i)(III) of the CEA to
permit an ETF share, TIR or Closed-End Fund share
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Sfmt 4703
to underlie a security future also provides that the
market price of the underlying share be $7.50 for
the majority of business days during the three
calendar months preceding listing of the SFP and
that the issuer of the ETF, TIR, or Closed-End Fund
be in compliance with all of the applicable
requirements of the Act. See Securities Exchange
Act Release No. 46090 (June 19, 2002), 67 FR 42760
(June 25, 2002). CME intends to comply with this
joint order. Telephone conversation between John
Labuszewski, Managing Director, CME, and
Florence E. Harmon, Senior Special Counsel,
Division of Market Regulation (‘‘Division’’),
Commission, on June 28, 2005.
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Section 6(h)(3) of the Act 19 contains
listing standards and conditions for
trading SFPs. Below is a summary of
each such requirement or condition,
followed by a brief explanation of how
CME would comply with it, whether by
particular provisions in CME Listing
Standards or otherwise.
Clause (A) of Section 6(h)(3) of the
Act 20 requires that any security
underlying a SFP be registered pursuant
to Section 12 of the Act.21 This
requirement is addressed by CME Rules
70001.2, 70003.2.b, 70004.2.a, and
proposed CME Rule 70002.1.a.
Clause (B) of Section 6(h)(3) of the
Act 22 requires that a market on which
a physically settled SFP is traded have
arrangements in place with a registered
clearing agency for the payment and
delivery of the securities underlying the
SFP. CME has reached an agreement
with a participant of DTC, a registered
clearing agency, to facilitate the
delivery-versus-payment transactions
which result from an agreement to make
or take delivery of the underlying
security by the market participant.23
This DTC participant would provide
CME with a dedicated DTC account.
This account would be a sub-account of
the participant’s main account and
would be utilized solely for CME
activity with respect to the delivery of,
and payment for, securities delivered
against CME SFPs. CME would act as a
contra party to each delivery
transaction. The CME Clearing House
would submit a delivery instruction for
each transaction to DTC by electronic
interface provided by the DTC
participant. Market participants would
be required to provide proof to CME
outlining their operational and legal
ability to make or take delivery of the
underlying securities. These agreements
and relevant procedures would be fully
operational prior to any possible
delivery event associated with such
SFPs.
Clause (C) of Section 6(h)(3) of the
Act 24 provides that listing standards for
SFPs must be no less restrictive than
comparable listing standards for options
traded on a national securities exchange
or national securities association
registered pursuant to Section 15A(a) of
19 15
U.S.C. 78f(h)(3).
U.S.C. 78f(h)(3)(A).
21 15 U.S.C. 78l.
22 15 U.S.C. 78f(h)(3)(B).
23 The Exchange clarified its arrangement for the
payment and delivery of securities underlying the
SFPs. Telephone conversation between John
Labuszewski, Managing Director, CME, and
Florence E. Harmon, Senior Special Counsel,
Division, Commission, on June 9, 2005.
24 15 U.S.C. 78f(h)(3)(C).
the Act.25 For the reasons discussed
herein, notwithstanding specified
differences between the Sample Listing
Standards and CME Listing Standards,
CME believes that the latter are no less
restrictive than comparable listing
standards for exchange-traded options.
Clause (D) of Section 6(h)(3) of the
Act 26 requires that each SFP be based
on common stock or such other equity
securities as the Commission and CFTC
jointly determine are appropriate. This
requirement is addressed by CME Rules
70001.1, 70002.1., 70003.2., and
70004.2.
Clause (E) of Section 6(h)(3) of the
Act 27 requires that each SFP be cleared
by a clearing agency that has in place
provisions for linked and coordinated
clearing with other clearing agencies
that clear SFPs, which permits the SFPs
to be purchased on one market and
offset on another market that trades
such product. CME proposes to clear
SFPs traded through Exchange facilities
through CME Clearing House. CME
Clearing House would have in place all
provisions for linked and coordinated
clearing as mandated by law and statute
as of the effective date of such laws and
statutes.
Clause (F) of Section 6(h)(3) of the
Act 28 requires that only a broker or
dealer subject to suitability rules
comparable to those of a national
securities association registered
pursuant to Section 15A(a) of the Act 29
effect transactions in a SFP. CME
clearing members and their
correspondents are bound by the
applicable sales practice rules of the
National Futures Association (‘‘NFA’’),
which is a national securities
association. As such, the sales practice
rules of NFA are, perforce, comparable
to those of a national securities
association registered pursuant to
Section 15A(a) of the Act.30 Moreover,
the application of NFA sales practice
rules is extended beyond the CME
clearing membership to the extent that
NFA By-Law 1101 provides that ‘‘[n]o
member may carry an account, accept
an order or handle a transaction in
commodity futures contracts for or on
behalf of any non-Member of NFA.’’
Clause (G) of Section 6(h)(3) of the
Act 31 requires that each SFP be subject
to the prohibition against dual trading
in Section 4j of CEA 32 and the rules and
20 15
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25 15
26 15
U.S.C. 78o–3(a).
U.S.C. 78f(h)(3)(D).
U.S.C. 78f(h)(3)(E).
U.S.C. 78f(h)(3)(F).
29 15 U.S.C. 78o–3(a).
30 15 U.S.C. 78o–3(a).
31 15 U.S.C. 78f(h)(3)(G).
32 15 U.S.C. 4j.
regulations thereunder or the provisions
of Section 11(a) of the Act 33 and the
rules and regulations thereunder. CME
Rule 123 requires Exchange members to
comply with all applicable ‘‘provisions
of the Commodity Exchange Act and
regulations duly issued pursuant thereto
by the CFTC.’’
Further, the prohibition of dual
trading in SFPs per Regulation § 41.27 34
adopted pursuant to Section 4j(a) of
CEA 35 applies to a contract market
operating an electronic trading system if
such market provides participants with
a time or place advantage or the ability
to override a predetermined matching
algorithm. The Exchange intends to
offer SFPs on CME exclusively on its
CME Globex electronic trading platform.
To the extent that the conditions cited
above do not exist in the context of the
CME Globex system, the CME Rulebook
contains no specific rule relating to dual
trading in an electronic forum.
Clause (H) of Section 6(h)(3) of the
Act 36 provides that trading in a SFP
must not be readily susceptible to
manipulation of the price of such SFP,
nor to causing or being used in the
manipulation of the price of any
underlying security, option on such
security, or option on a group or index
including such securities. CME believes
that CME Listing Standards are designed
to ensure that CME SFPs and the
underlying securities would not be
readily susceptible to price
manipulation. Under CME Rule 432, an
activity ‘‘to manipulate prices or to
attempt to manipulate prices’’ is a
‘‘major offense’’ punishable, per CME
Rule 430, by ‘‘expulsion, suspension,
and/or a fine of not more than
$1,000,000 plus the monetary value of
any benefit received as a result of the
violative action.’’
Clause (I) of Section 6(h)(3) of the
Act 37 requires that procedures be in
place for coordinated surveillance
amongst the market on which a SFP is
traded, any market on which any
security underlying the SFP is traded,
and other markets on which any related
security is traded to detect manipulation
and insider trading. The Exchange has
surveillance procedures in place to
detect manipulation on a coordinated
basis with other markets. In particular,
CME is an affiliate member of the
Intermarket Surveillance Group (‘‘ISG’’)
and is party to an affiliate agreement
and an agreement to share market
surveillance and regulatory information
27 15
28 15
Frm 00110
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33 15
U.S.C. 78k(a).
CFR 41.27.
35 7 U.S.C. 6j(a).
36 15 U.S.C. 78f(h)(3)(H).
37 15 U.S.C. 78f(h)(3)(I).
34 17
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with the other ISG members. Further,
CME is party to a supplemental
agreement with the other ISG members
to address the concerns expressed by
the Commission with respect to affiliate
ISG membership.38 Finally, CME Rule
424 permits CME to enter into
agreements for the exchange of
information and other forms of mutual
assistance with domestic or foreign selfregulatory organizations, associations,
boards of trade, and their respective
regulators.
Clause (J) of Section 6(h)(3) of the
Act 39 requires that a market on which
a SFP is traded have in place audit trails
necessary or appropriate to facilitate the
coordinated surveillance referred to in
the preceding paragraph. The Exchange
states that it relies upon its Market
Regulation Department and its large,
highly trained staff to actively monitor
market participants and their trading
practices and to enforce compliance
with CME rules. CME Market Regulation
Department staff is organized into
Compliance and Market Surveillance
Groups. In performing its functions,
CME Market Regulation Department
routinely works closely with CME Audit
Department, CME Clearing House, CME
Legal Department, CME Globex Control
Center, and CME Information
Technology Department.
CME Compliance is responsible for
enforcing the trading practice rules of
the Exchange through detection,
investigation, and prosecution of those
who may attempt to violate those CME
Rules. Further, CME Compliance is
responsible for handling customer
complaints, ensuring the integrity of the
Exchange’s audit trail, and
administering an arbitration program for
the resolution of disputes. CME
Compliance employs investigators,
attorneys, trading floor investigators,
data analysts, and a computer
programming and regulatory systems
design staff.
CME believes that CME Market
Regulation Department has created
some of the most sophisticated tools in
the world to assist with the detection of
possible rule violations and monitoring
of the market. Among the systems it
uses are the Regulatory Trade Browser
(‘‘RTB’’), the Virtual Detection System
(‘‘VDS’’), the Reportable Position
System (‘‘RPS’’), and the RegWeb Profile
System (‘‘RegWeb’’). These systems
include information on all CME Globex
users, all transactions, large positions,
38 See Securities Exchange Act Release No. 45956
(May 17, 2002), 67 FR 36740 (May 24, 2002) (joint
CFTC and Commission rule relating to cash
settlement and regulatory halt requirements for
SFPs).
39 15 U.S.C. 78f(h)(3)(J).
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16:03 Jul 08, 2005
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and statistical information on trading
entities.
CME Market Surveillance is dedicated
to the detection and prevention of
market manipulation and other similar
forms of market disruption. As part of
these responsibilities, CME Market
Surveillance enforces the Exchange’s
position limit rules, administers the
hedge approval process, and maintains
the Exchange’s RPS system.
CME believes that the foundation of
the CME Market Surveillance program is
the deep knowledge of its staff about the
major users, brokers, and clearing firms,
along with its relationship with other
regulators. Day-to-day monitoring of
market positions is handled by a
dedicated group of surveillance analysts
assigned to specific market(s). Each
analyst develops in-depth expertise of
the factors that influence the market in
question. The Exchange estimates that
perhaps 90% of the market users at any
single time are known to the Exchange.
Daily surveillance staff activities
include:
• Monitoring positions for size based
on percentage of open interest and
historic user participation in each
contract.
• Aggregation of positions across
clearing members with the use of CME
trade reporting systems to account for
all positions held by any single
participant. CME believes that this daily
review permits the surveillance analyst
to promptly identify unusual market
activity.
• As a contract approaches maturity,
large positions are scrutinized to
determine whether such activity is
consistent with prior experience,
allowing prompt regulatory intervention
if necessary.
• Analysts closely monitor market
news through on-line and print media.
• Staff conducts on-site visits to large
market participants periodically.
CME Market Regulation staff
investigates possible misconduct and,
when appropriate, initiates disciplinary
action. CME Rule 430 empowers the
Exchange’s disciplinary committees to
discipline, limit, suspend, or terminate
a member’s activities for cause, amongst
other sanctions. Further, per CME Rule
123, the Exchange requires its members
to be responsible for ‘‘the filing of
reports, maintenance of books and
records, and permitting inspection and
visitation’’ in order to facilitate such
investigations by Exchange staff.
CME Rule 536 requires that certain
information be recorded with respect to
each order, including: Time entered,
terms of the order, order type,
instrument and contract month, price,
quantity, account type, account
PO 00000
Frm 00111
Fmt 4703
Sfmt 4703
39825
designation, user code, and clearing
firm. This information may be recorded
manually on timestamped order tickets,
electronically in a clearing firms system,
or by entering the orders with the
required information into CME Globex
immediately upon receipt. A complete
CME Globex electronic audit trail is
archived and maintained by CME for at
least a five-year period. Clearing firms
must also maintain any written or
electronic order records for a period of
five years.
Clause (K) of Section 6(h)(3) of the
Act 40 requires that a market on which
a SFP is traded have in place procedures
to coordinate trading halts between such
market and any market on which any
security underlying the SFP is traded
and other markets on which any related
security is traded. The Exchange filed
with the Commission CME Rules
establishing a generalized framework for
the trade of SFPs.41 In particular,
proposed CME Rule 71001.F. provides,
in accordance with Regulation
§ 41.25(a)(2) of CEA,42 that ‘‘[t]rading of
Physically Delivered Single Security
Futures shall be halted at all times that
a regulatory halt, as defined per SEC
Rule 6h–1(a)(3) and CFTC Regulation
§ 41.1(l), has been instituted for the
underlying security.’’
Clause (L) of Section 6(h)(3) of the
Act 43 requires that the margin
requirements for a SFP comply with the
regulations prescribed pursuant to
Section 7(c)(2)(B) of the Act.44 CME has
margin rules in place.45 Thus, CME
believes that its customer margin rules
are consistent with the requirements of
the Act.
For the reasons described above, CME
believes that CME Listing Standards
submitted herewith satisfy the
requirements set forth in Section 6(h)(3)
of the Act.46
2. Statutory Basis
The Exchange believes that its
proposed rule change, as amended, is
consistent with Section 6(b) of the
Act,47 in general, and furthers the
objectives of Section 6(b)(5) of the Act,48
in particular, in that it is designed to
remove impediments to and perfect the
mechanism for a free and open market
and a national market system, and, in
40 U.S.C.
78f(h)(3)(K).
SR–CME–2005–03.
42 17 CFR 41.25(a)(2).
43 15 U.S.C. 78f(h)(3)(L).
44 15 U.S.C. 78g(c)(2)(B).
45 See Securities Exchange Act Release No. 46637
(October 10, 2002), 67 FR 64672 (October 21, 2002)
(SR–CME–2002–01).
46 15 U.S.C. 78f(h)(3).
47 15 U.S.C. 78f(b).
48 15 U.S.C. 78f(b)(5).
41 See
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general, to protect investors and the
public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CME does not believe that the
proposed rule change, as amended,
would impose any burden on
competition that is not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
The Exchange has not solicited, and
does not intend to solicit, comments on
this proposed rule change. The
Exchange has not received any
unsolicited written comments from
members or other interested parties.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change,
as amended, has become effective
pursuant to Section 19(b)(7) of the
Act.49 Within 60 days of the date of
effectiveness of the proposed rule
change, as amended, the Commission,
after consultation with the CFTC, may
summarily abrogate the proposed rule
change and require that the proposed
rule change be refiled in accordance
with the provisions of Section 19(b)(1)
of the Act.50
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CME–2005–03 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–9303.
All submissions should refer to File
Number SR–CME–2005–03. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Section. Copies of such filing also will
be available for inspection and copying
at the principal office of CME. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CME–2005–03 and should
be submitted on or before August 1,
2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.51
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5–3618 Filed 7–8–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51959; File No. SR–CME–
2005–01]
Self-Regulatory Organization; Chicago
Mercantile Exchange; Notice of Filing
and Immediate Effectiveness of a
Proposed Rule Change Relating to
Listing Standards for Security Futures
Products
June 30, 2005.
Pursuant to Section 19(b)(7) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–7 thereunder,2
notice is hereby given that on May 4,
2005, the Chicago Mercantile Exchange
(‘‘CME’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘Commission’’) the proposed rule
change described in Items I, II, and III
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(7).
2 17 CFR 240.19b–7.
below, which Items have been prepared
by CME.
CME has also certified the proposed
rule change with the Commodity
Futures Trading Commission (‘‘CFTC’’)
under Section 5c(c) of the Commodity
Exchange Act (‘‘CEA’’) 3 on May 4, 2005.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CME proposes to amend its Security
Futures Product Listing Standards
(‘‘Listing Standards’’) for purposes of
Section 6(h) of the Act.4 These
amendments are intended to conform
CME Listing Standards for physically
settled security futures products,
including exchange traded funds
(‘‘ETFs’’), trust issued receipts (‘‘TIRs’’),
closed-end funds and narrow-based
indices (‘‘NRIs’’), to current industry
practices. The text of the proposed rule
change is below. Proposed new
language is italicized; and proposed
deletions are in [brackets].
CHAPTER 700: SECURITY FUTURES
PRODUCT LISTING STANDARDS
70000. SCOPE OF CHAPTER
No change.
70001. SINGLE SECURITY FUTURES—
INITIAL LISTING STANDARDS
For a Security Futures Product, that is
physically settled, to be eligible for
initial listing, the security underlying
the futures contract must meet each of
the following requirements:
1.–5. No change.
6. In the case of an underlying
security other than an ETF Share, TIR or
Closed-End Fund Share, it must have
had [an average daily trading volume (in
all markets in which the underlying
security has traded) of at least 109,000
shares or receipts evidencing the
underlying security in each of the
preceding 12 months.] total trading
volume (in all markets in which the
underlying security is traded) of at least
2,400,000 shares or receipts evidencing
the underlying security in the preceding
12 months.
Interpretation of Requirement 6 as
Applied to Restructure Securities
No change.
7. No change.
8. [It must have had a market price
per security of at least $7.50, as
measured by the lowest closing price
51 17
49 15
U.S.C. 78s(b)(7).
50 15 U.S.C. 78s(b)(1).
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1 15
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37
U.S.C. 7a–2(c).
U.S.C. 78f(h).
4 15
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]]>Agencies
[Federal Register Volume 70, Number 131 (Monday, July 11, 2005)]
[Notices]
[Pages 39820-39826]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-3618]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51957; File No. SR-CME-2005-03]
Self-Regulatory Organization; Chicago Mercantile Exchange; Notice
of Filing and Immediate Effectiveness of a Proposed Rule Change and
Amendment No. 1 Thereto Relating to Rules Governing Contract
Specifications for Physically Delivered Single Security Futures
June 30, 2005.
Pursuant to Section 19(b)(7) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-7 thereunder,\2\ notice is hereby given that
on May 4, 2005, the Chicago Mercantile Exchange (``CME'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change described in Items I, II, and
III below, which Items have been prepared by the Exchange. On May 31,
2005, CME filed Amendment No. 1 to the proposed rule change.\3\ The
Commission is publishing this notice, as amended, to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(7).
\2\ 17 CFR 240.19b-7.
\3\ See letter from John W. Labuszewski, Managing Director, CME,
to Florence E. Harmon, Senior Special Counsel, Division of Market
Regulation (``Division''), Commission, on May 31, 2005. (``Amendment
No. 1''). In Amendment No. 1, the Exchange proposes to amend the
size of its iShares Russell 2000 (``IWM'') futures contract to 200
instead of 100 shares. The Exchange believes that this implies that
the value of the $0.01 minimum price fluctuation shall be $2.00
instead of $1.00. Also, the Exchange proposes to amend the launch
date for IWM futures to June 20, 2005 from June 6, 2005.
---------------------------------------------------------------------------
CME has also certified the proposed rule change with the Commodity
Futures Trading Commission (``CFTC'') under Section 5c(c) of the
Commodity Exchange Act (``CEA'') \4\ on May 4, 2005.
---------------------------------------------------------------------------
\4\ 7 U.S.C. 7a-2(c).
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CME proposes to adopt rules governing the trade of physically
delivered single security futures products (``SFPs''). Further, the
Exchange hereby certifies the listing of futures on Exchange Traded
Funds (``ETFs''), specifically, the Nasdaq-100 Tracking Stock
SM (``QQQQ''), Standard & Poor's Depositary Receipts
[supreg] (``SPDR''), and IWM.\5\ The Exchange believes that these
contract specifications are substantially similar to contract
specifications currently in use with respect to physically delivered
single security futures traded elsewhere. Proposed new language is
italicized.
---------------------------------------------------------------------------
\5\ The Exchange proposes to make the proposed rule change
effective on June 6, 2005 when it intends to list for trading
futures based on SPDRs and QQQQs. The Exchange proposes to list
futures based on IWMs on June 20, 2005. See Amendment No. 1, supra
note 3.
---------------------------------------------------------------------------
CHAPTER 710: PHYSICALLY DELIVERED SINGLE SECURITY FUTURES
71000. SCOPE OF CHAPTER
This chapter is limited in application to contract specifications
applied to security futures contracts that require the physical
delivery of a single security (a ``Physically Delivered Single Security
Futures''). Single securities that are eligible for listing per this
Chapter 710 include those that meeting the initial listing standards
per Exchange Rule 70001 and the maintenance listing standards per
Exchange Rule 70002.
71001. FUTURES CALL
71001.A. Trading Unit
Physically Delivered Single Security Futures contracts shall
require the delivery of a particular number of shares, as specified per
Rule 71004, of common stock; an exchange traded fund (``ETF Share''); a
trust issued receipt (``TIR''); a registered closed-end management
investment company (``Closed-End Fund Share''); or, American Depository
Receipts (``ADR'').
71001.B. Price Increments
Physically Delivered Single Security Futures contracts shall be
traded in U.S. Dollars with a minimum price increment as determined by
the Board of Directors as depicted in Rule 71004.
71001.C. Trading Schedule
Physically Delivered Single Security Futures contracts may be
traded during such hours, for delivery in such months as determined by
the Board of Directors.
71001.D. Termination of Trading
All trading in a particular Physically Delivered Single Security
Futures contract shall terminate at the close of business on the third
Friday of the contract month.
71001.E. Position Limits
Position limits shall be applied on Physically Delivered Single
Security Futures contracts such that, during the last five trading days
of an expiring contract month, a person shall not own or control more
than a specified number of contracts net long or net short in the
expiring contract month, as depicted in Exchange Rule 71004. Position
limits for each Physically Delivered Single Security Futures contract
shall be
[[Page 39821]]
determined on a case-by-case basis at levels no greater than those
prescribed by CFTC Regulation Sec. 41.25(a)(3).
71001.F. Price Limits and Trading Halts
There is no daily price limit for Physically Delivered Single
Security Futures contracts. Trading of Physically Delivered Single
Security Futures shall be halted at all times that a regulatory halt,
as defined per SEC Rule 6h-1(a)(3) and CFTC Regulation Sec. 41.1(l),
has been instituted for the underlying security.
71002. SETTLEMENT PRICE
71002.A. Daily Settlement Price
Except for the last day of trading on an expiring contract, daily
settlement prices shall be determined per Rule 813.
71002.B. Final Settlement Price
On the last day of trading for an expiring contract, the Final
Settlement Price is determined in accordance with Rule 71002.A. unless
the Final Settlement Price is fixed in accordance with Rule 70120.
71003. DELIVERY
Three (3) business days after the last trading day for an expiring
contract, the National Securities Clearing Corporation and Depository
Trust Corporation will facilitate delivery of, and payment for, the
underlying common stock, American Depository Receipts, shares of
exchange-traded funds, shares of closed-end management investment
companies, or trust issued receipts whereby: a seller (i.e., the holder
of a net short position) delivers the securities underlying the
contract to a respective buyer (i.e., the holder of a net long
position); and, in exchange, that buyer pays his respective seller the
aggregate dollar amount of the Expiration Day Settlement Price
multiplied by the quantity of the underlying securities delivered.\6\
---------------------------------------------------------------------------
\6\ The Exchange has clarified that Depository Trust Corporation
will facilitate delivery of, and payment for, the underlying common
stock, American Depository Receipts, shares of exchange-traded
funds, shares of closed-end management investment companies, or
trust issued receipts via a participant of DTC with whom CME has a
dedicated account. Telephone conversation between John Labuszewski,
Managing Director, CME, and Florence E. Harmon, Senior Special
Counsel, Division, Commission, on June 9, 2005.
---------------------------------------------------------------------------
71004. APPROVED SECURITIES
The following securities have been approved by the Board of
Directors as the subject of Physically Delivered Single Security
Futures Contracts:
----------------------------------------------------------------------------------------------------------------
Position limit in
expiring contract
Approved security Unit of trading Minimum fluctuation in last 5 trading
days
----------------------------------------------------------------------------------------------------------------
Nasdaq-100 Tracking Stock\SM\ 200 shares............. $0.01 or $2.00 per contract. 11,250
(``QQQQ'').
Standard & Poor's Depositary 100 shares............. $0.01 or $1.00 per contract. 22,500
Receipts [supreg] (``SPDR'').
iShares Russell 2000 ( ``IWM'')..... 200 shares............. $0.01 or $2.00 per contract. \7\ 11,250
----------------------------------------------------------------------------------------------------------------
\7\ Trading in physically settled futures on IWMs did not qualify for the 22,500 position limit pursuant to CFTC
Regulation Sec. 41.25(a)(3)(i)(A) prior to the 2-for-1 split with an ex-date of June 9, 2005. However, after
the split, futures based on IWMs do qualify for a net position limit no greater than 22,500 (100 share
contract) pursuant to this CFTC Regulation. To the extent that CME amended the IWM contract size from the
originally proposed 100 share contract to 200 share contract as a result of the split, the applicable position
limit for futures on IWM contracts pursuant to CFTC Regulation Sec. 41.25 would be 11,250. Telephone
conversation between John Labuszewski, Managing Director, CME, and Florence E. Harmon, Senior Special Counsel,
Division, Commission, on June 28, 2005.
71005. EMERGENCIES, ACTS OF GOD, ACTS OF GOVERNMENT
If delivery or acceptance or any precondition or requirement of
either is prevented by a strike, fire, accident, action of government
or act of God, the seller or buyer shall immediately notify the
Exchange President. If the President determines that emergency action
may be necessary, he shall call a special meeting of the Board of
Directors and arrange for the presentation of evidence respecting the
emergency condition. If the Board determines that an emergency
condition exists, it shall take such action as it deems necessary under
the circumstances and its decision shall be binding upon all parties to
the contract.
INTERPRETATIONS & SPECIAL NOTICES RELATING TO CHAPTER 710
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
(``S&P''), does not guarantee the accuracy and/or completeness of the
S&P Stock Indices or any data included therein. S&P makes no warranty,
express or implied, as to the results to be obtained by any person or
any entity from the use of the S&P Index ETFs or any data included
therein in connection with the trading of futures contracts, options on
futures contracts or any other use. S&P makes no express or implied
warranties, and expressly disclaims all warranties of merchantability
or fitness for a particular purpose or use with respect to the S&P
Index ETFs or any data included therein. Without limiting any of the
foregoing, in no event shall S&P have any liability for any special,
punitive, indirect, or consequential damages (including lost profits),
even if notified of the possibility of such damages.
NEITHER FRANK RUSSELL COMPANY'S PUBLICATION OF THE RUSSELL INDEXES
NOR ITS LICENSING OF ITS TRADEMARKS FOR USE IN CONNECTION WITH
SECURITIES OR OTHER FINANCIAL PRODUCTS DERIVED FROM A RUSSELL INDEX IN
ANY WAY SUGGESTS OR IMPLIES A REPRESENTATION OR OPINION BY FRANK
RUSSELL COMPANY AS TO THE ATTRACTIVENESS OF INVESTMENT IN ANY
SECURITIES OR OTHER FINANCIAL PRODUCTS BASED UPON OR DERIVED FROM ANY
RUSSELL INDEX. FRANK RUSSELL COMPANY IS NOT THE ISSUER OF ANY SUCH
SECURITIES OR OTHER FINANCIAL PRODUCTS AND MAKES NO EXPRESS OR IMPLIED
WARRANTIES OF MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE
WITH RESPECT TO ANY RUSSELL INDEX OR ANY DATA INCLUDED OR REFLECTED
THEREIN, NOR AS TO RESULTS TO BE OBTAINED BY ANY PERSON OR ANY ENTITY
FROM THE USE OF THE RUSSELL INDEX OR ANY DATA INCLUDED OR REFLECTED
THEREIN.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change and
discussed any comments it received on the proposed rule change, as
amended. The text of these statements may be examined at the places
specified in Item IV below. The Exchange has prepared
[[Page 39822]]
summaries, set forth in Sections A, B, and C below, of the most
significant aspects or such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The Exchange proposes to adopt contract specifications governing
physically delivered single security futures. Further, the Exchange
proposes to list for trading, per such rules, futures on ETFs,
specifically, QQQQ, SPDR, and IWM. The Exchange intends to offer
physically delivered single security futures exclusively on CME's
GLOBEX[supreg] electronic trading platform as opposed to trading on the
floor of the Exchange.
Contract Size--CME Rule 71001.A., Trading Unit, specifies that
``Physically Delivered Single Security Futures contracts shall require
the delivery of a particular number of shares, as specified per CME
Rule 71004, of common stock; an exchange traded fund (`ETF Share'); a
trust issued receipt (`TIR'); a registered closed-end management
investment company (`Closed-End Fund Share'); or, American Depository
Receipts (`ADR').'' CME Rule 71004, Approved Securities, provides that
futures based on SPDRs shall be traded in units of 100 shares. SPDRs
closed at $117.96 on March 31, 2005. The Exchange believes that this
implies a contract valuation of $11,796. However, the Exchange proposes
to trade QQQQs and IWMs based upon a 200-share unit. The Nasdaq-100
Tracking Stock closed at $36.57 on March 31, 2005, which equates to a
contract value of $7,314. IWMs closed at $124.24 on March 31, 2005 but
are scheduled to be split on a 2-for-1 basis on June 9, 2005 which, the
Exchange believes, implies a post-split share value of $62.12 or a
contract value of $12,424 based upon a 200-share contract.
The Exchange believes that these values are generally somewhat
smaller than the size of the E-mini S&P 500, E-mini Russell 2000, and
E-mini Nasdaq-100. The Exchange further believes that they are
generally, with the exception of QQQQs and IWMs, consistent with
practices in the context of other SFPs and with ETF-based options
traded on stock option exchanges, which are generally based upon a 100-
share trading unit.
Quotation Specification--CME Rule 71002.B., Price Increments,
provides that ``Physically Delivered Single Security Futures contracts
shall be traded in U.S. Dollars with a minimum price increment as
determined by the Board of Directors as depicted in Rule 71004.'' CME
Rule 71004, Approved Securities, provides that ETF futures would be
quoted in minimum increments of $0.01 per share. The Exchange believes
that this equates to a $1.00 tick in the context of SPDRs and a $2.00
tick in QQQQs and IWMs. The Exchange further believes that this
provision is not inconsistent with provisions associated with other
extant SFPs or stock options based on ETFs. Moreover, the Exchange
believes that a penny tick matches practices in the underlying ETF
markets.
Position Limits--CME Rule 71001.E., Position Limits, provides that
``[p]osition limits shall be applied on Physically Delivered Single
Security Futures contracts such that, during the last five trading days
of an expiring contract month, a person shall not own or control more
than a specified number of contracts net long or net short in the
expiring contract month, as depicted in CME Rule 71004. Position limits
for each Physically Delivered Single Security Futures contract shall be
determined on a case-by-case basis in accordance with CFTC Regulation
Sec. 41.25(a)(3).'' CME Rule 71004, Approved Securities, provides that
the position limit applied to futures based on QQQQs and IWMs during
the last five trading days of an expiring contract month shall be
11,250 contracts and 22,500 contracts for SPDRs. The Exchange
represents that these figures were determined by reference to CFTC
Regulation Sec. 41.25(a)(3),\8\ which prescribes appropriate position
limits by reference to the average daily volume (ADV) in the security
over the prior six (6) months and the shares outstanding.
---------------------------------------------------------------------------
\8\ 17 CFR 41.25(a)(3). IWMs qualify for the 22,500 position
limit on a post-split basis because the trading volume and shares
outstanding doubled due to the 2-for-1 split on June 9, 2005.
Because of the split, the average daily trading volume is considered
doubled for the most recent six-month period in compliance with CFTC
Regulation Sec. 41.25. Telephone conservation between John
Labuszewski, Managing Director, CME, and Florence E. Harmon, Senior
Special Counsel, Division, Commission, on June 28, 2005.
----------------------------------------------------------------------------------------------------------------
Shares outstanding
ADV (10/04-3/05) (000)
----------------------------------------------------------------------------------------------------------------
SPDRs......................................................... 51,890,256 425,860 (4/22/05)
IWMs (pre-split).............................................. 8,022,330 40,950 (4/22/05)
IWMs (post-split)............................................. 16,044,660 81,900 (4/22/05)
QQQQs......................................................... 98,137,035 520,900 (4/21/05)
----------------------------------------------------------------------------------------------------------------
The Exchange believes that the 11,250 contract limit adopted in the
context of IWMs and QQQQs is in conformance with CFTC Regulation Sec.
41.25(a)(3)(i)(A) \9\ which specifies that ``where the average daily
trading volume in the underlying security exceeds 20 million shares, or
exceeds 15 million shares and there are more than 40 million shares of
the underlying shares of the underlying security outstanding, the
designated contract market * * * may adopt a net position limit no
greater than 22,500 (100-share) contracts.'' However, to the extent
that the Exchange proposes to adopt a 200-share contract with respect
to IWMs and QQQQs, the 22,500 limit need be halved to 11,250 contracts.
Finally, the Exchange believes that SPDRs likewise exceed the
parameters specified per CFTC Regulation Sec. 41.25(a)(3)(i)(A).\10\
Thus, the Exchange proposes to adopt a 22,500 limit, noting the
proposed 100-share contract size.
---------------------------------------------------------------------------
\9\ 17 CFR 41.25(a)(3)(i)(A).
\10\ 17 CFR 41.25(a)(3)(i)(A).
---------------------------------------------------------------------------
Trading Schedule--The CME Board has determined that trading in
futures on the three ETFs mentioned above shall be conducted from 8:30
a.m. to 3:15 p.m., Mondays through Fridays (Chicago time), when the
underlying markets for the ETFs are open.\11\ The CME Board has further
determined initially to list futures for delivery in the first two
quarterly delivery months in the March, June, September, and December
cycle plus the first two non-quarterly or ``serial'' months (January,
February, April, May, July, August, October, November) per CME Rule
71001.C., Trading Schedule.
---------------------------------------------------------------------------
\11\ CME confirmed that futures on the three ETFs would not be
traded during holidays and other periods when the underlying markets
for the ETFs are not open. Telephone conversation between Richard
Co, Director of Financial Research, CME, and Florence E. Harmon,
Senior Special Counsel, Division, Commission, on June 24, 2005.
[[Page 39823]]
Summary Terms and Conditions
------------------------------------------------------------------------
------------------------------------------------------------------------
Contract Size................ One-hundred (100) ETF shares of S&P 500
(SPDR); or two-hundred (200) shares of
Nasdaq-100 Tracking Stock\SM\ (QQQQ) or
iShares Russell 2000 (IWM).
Contract Months.............. March Quarterly Cycle plus first two
serial months.
Trading Hours................ Traded on the GLOBEX[supreg] electronic
trading platform from 8:30 am to 3:15 pm
Mondays through Fridays (Chicago times).
Minimum Price Fluctuation.... $0.01 or $1.00 per contract in context of
SPDRs; $2.00 per contract in context of
QQQQs and IWMs.
Trading Halts................ Trading halts are coordinated with halts
in the underlying ETFs.
Position Limits.............. 11,250 contracts for QQQQs and IWMs and
22,500 contracts for SPDRs net long or
short during the last five (5) trading
days of an expiring contract.
Final Settlement Date........ Third Friday of the Contract Month.
Last Trading Day............. Trades until the normal close of trading
on the Final Settlement Date.
Final Settlement............. Final settlement is accomplished through
delivery of the requisite number of ETF
shares.
------------------------------------------------------------------------
Trading Halts--CME Rule 71001.F., Price Limits and Trading Halts,
provides that there would be no daily price limit for Physically
Delivered Single Security Futures contracts. However, trading of
Physically Delivered Single Security Futures shall be halted at all
times that a regulatory halt, as defined in CFTC Regulation
41.1(1),\12\ has been instituted for the underlying security. The
Exchange believes that this provision is consistent with the
prescriptions of CFTC Regulation Sec. 41.25(a)(2)(i) \13\ and Rule 6h-
1(a)(3) of the Act.\14\
---------------------------------------------------------------------------
\12\ 17 CFR 41.1(1).
\13\ 17 CFR 41.25(a)(2)(i).
\14\ 17 CFR 240.6h-1(a)(3).
---------------------------------------------------------------------------
Daily Settlement--Settlement prices on a daily basis shall be
established per current Exchange practices as defined in CME Rule 813,
Settlement Price.
Final Settlement--Final settlement would be accomplished through
the delivery of the underlying securities against the expiring contract
per the provisions of CME Rule 71003, Delivery. Specifically, CME Rule
71003 provides that ``[t]hree (3) business days after the last trading
day for an expiring contract, the National Securities Clearing
Corporation (``NSCC'') and Depository Trust Corporation (``DTC'') will
facilitate delivery of, and payment for, the underlying * * *
[security] * * * whereby: A seller * * * delivers the securities * * *
and, in exchange, that buyer pays his respective seller the aggregate
dollar amount of the Expiration Day Settlement Price multiplied by the
quantity of the underlying securities delivered.'' \15\ The invoice
amount would be established per CME Rule 71002.B., Final Settlement
Price, as the closing price of the futures contract established per
normal settlement procedures.\16\ Deliveries shall be facilitated
through the CME Clearing House and its designated facilitating agents.
---------------------------------------------------------------------------
\15\ As described below, CME has reached an agreement with a
participant of DTC, a registered clearing agency, to facilitate the
delivery-versus-payment transactions that result from an agreement
to make or take delivery of the ETFs.
\16\ See Amendment No. 1, supra note 3.
---------------------------------------------------------------------------
Compliance With Listing Standards--Single securities eligible for
listing per these proposed rules would be governed by Chapter 700 of
the Exchange's Rulebook (``Rulebook''), which specifies initial and
maintenance listing standards for physically delivered single security
futures and for security futures based on an Index of two or more
securities.\17\ The Exchange believes that Chapter 710 of the Rulebook
governing physically delivered single security futures is based closely
upon the specifications under which single security futures are traded
elsewhere.
---------------------------------------------------------------------------
\17\ Chapter 700 of the CME Rulebook has been developed for
purposes of compliance with Section 6(h) of the Act. CME believes
that CME Listing Standards are generally identical to the sample
listing standards published in the Commission's, Division of Market
Regulation Staff Legal Bulletin No. 15, as supplemented by the Joint
Order of the Commission and CFTC identifying listing standards for
shares of ETFs, TIRs, and Closed-End Fund. See Commission, Division:
Staff Legal Bulletin No. 15: Listing Standards for Trading Security
Futures Products (September 5, 2001). See also Securities Exchange
Act Release No. 46090 (June 19, 2002), 67 FR 42760 (June 25, 2002).
---------------------------------------------------------------------------
In order to attain initial eligibility for listing, a security must
comply with certain requirements with respect to activity and issue
size as discussed below. As illustrated in the accompanying table, all
three of the subject securities meet the qualifications for initial
listing as specified above.
Per CME Rule 70001.1., ``[t]here must be at least seven
million shares or receipts evidencing the underlying security
outstanding.''
Per CME Rule 70001.7, ``it must have had a total trading
volume * * * of at least 2,400,000 shares or receipts evidencing the
underlying security in the preceding 12 months.''
Per CME Rule 70001.8, ``the market price per share of the
underlying security has been at least $3.00 for the previous five
consecutive business days preceding the date on which the Exchange
commences to list and trade the Security Futures Product on said
underlying security.'' \18\
---------------------------------------------------------------------------
\18\ The joint order by the CFTC and the Commission modifying
the requirement specified in Section 6(h)(3)(D) of the Act and the
criterion specified in Section 2(a)(1)(D)(i)(III) of the CEA to
permit an ETF share, TIR or Closed-End Fund share to underlie a
security future also provides that the market price of the
underlying share be $7.50 for the majority of business days during
the three calendar months preceding listing of the SFP and that the
issuer of the ETF, TIR, or Closed-End Fund be in compliance with all
of the applicable requirements of the Act. See Securities Exchange
Act Release No. 46090 (June 19, 2002), 67 FR 42760 (June 25, 2002).
CME intends to comply with this joint order. Telephone conversation
between John Labuszewski, Managing Director, CME, and Florence E.
Harmon, Senior Special Counsel, Division of Market Regulation
(``Division''), Commission, on June 28, 2005.
----------------------------------------------------------------------------------------------------------------
Shares outstanding Total volume (4/ Price (3/31/
(000) 04-3/05) 05)
----------------------------------------------------------------------------------------------------------------
SPDRs................................................... 425,860 (4/22/05) 11,841,058,200 $117.96
IWMs.................................................... 40,950 (4/22/05) 1,849,663,900 112.15
QQQQs................................................... 520,900 (4/21/05) 24,973,601,523 36.57
----------------------------------------------------------------------------------------------------------------
Section 6(h)(3) of the Act Requirements
[[Page 39824]]
Section 6(h)(3) of the Act \19\ contains listing standards and
conditions for trading SFPs. Below is a summary of each such
requirement or condition, followed by a brief explanation of how CME
would comply with it, whether by particular provisions in CME Listing
Standards or otherwise.
---------------------------------------------------------------------------
\19\ 15 U.S.C. 78f(h)(3).
---------------------------------------------------------------------------
Clause (A) of Section 6(h)(3) of the Act \20\ requires that any
security underlying a SFP be registered pursuant to Section 12 of the
Act.\21\ This requirement is addressed by CME Rules 70001.2, 70003.2.b,
70004.2.a, and proposed CME Rule 70002.1.a.
---------------------------------------------------------------------------
\20\ 15 U.S.C. 78f(h)(3)(A).
\21\ 15 U.S.C. 78l.
---------------------------------------------------------------------------
Clause (B) of Section 6(h)(3) of the Act \22\ requires that a
market on which a physically settled SFP is traded have arrangements in
place with a registered clearing agency for the payment and delivery of
the securities underlying the SFP. CME has reached an agreement with a
participant of DTC, a registered clearing agency, to facilitate the
delivery-versus-payment transactions which result from an agreement to
make or take delivery of the underlying security by the market
participant.\23\ This DTC participant would provide CME with a
dedicated DTC account. This account would be a sub-account of the
participant's main account and would be utilized solely for CME
activity with respect to the delivery of, and payment for, securities
delivered against CME SFPs. CME would act as a contra party to each
delivery transaction. The CME Clearing House would submit a delivery
instruction for each transaction to DTC by electronic interface
provided by the DTC participant. Market participants would be required
to provide proof to CME outlining their operational and legal ability
to make or take delivery of the underlying securities. These agreements
and relevant procedures would be fully operational prior to any
possible delivery event associated with such SFPs.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(h)(3)(B).
\23\ The Exchange clarified its arrangement for the payment and
delivery of securities underlying the SFPs. Telephone conversation
between John Labuszewski, Managing Director, CME, and Florence E.
Harmon, Senior Special Counsel, Division, Commission, on June 9,
2005.
---------------------------------------------------------------------------
Clause (C) of Section 6(h)(3) of the Act \24\ provides that listing
standards for SFPs must be no less restrictive than comparable listing
standards for options traded on a national securities exchange or
national securities association registered pursuant to Section 15A(a)
of the Act.\25\ For the reasons discussed herein, notwithstanding
specified differences between the Sample Listing Standards and CME
Listing Standards, CME believes that the latter are no less restrictive
than comparable listing standards for exchange-traded options.
---------------------------------------------------------------------------
\24\ 15 U.S.C. 78f(h)(3)(C).
\25\ 15 U.S.C. 78o-3(a).
---------------------------------------------------------------------------
Clause (D) of Section 6(h)(3) of the Act \26\ requires that each
SFP be based on common stock or such other equity securities as the
Commission and CFTC jointly determine are appropriate. This requirement
is addressed by CME Rules 70001.1, 70002.1., 70003.2., and 70004.2.
---------------------------------------------------------------------------
\26\ 15 U.S.C. 78f(h)(3)(D).
---------------------------------------------------------------------------
Clause (E) of Section 6(h)(3) of the Act \27\ requires that each
SFP be cleared by a clearing agency that has in place provisions for
linked and coordinated clearing with other clearing agencies that clear
SFPs, which permits the SFPs to be purchased on one market and offset
on another market that trades such product. CME proposes to clear SFPs
traded through Exchange facilities through CME Clearing House. CME
Clearing House would have in place all provisions for linked and
coordinated clearing as mandated by law and statute as of the effective
date of such laws and statutes.
---------------------------------------------------------------------------
\27\ 15 U.S.C. 78f(h)(3)(E).
---------------------------------------------------------------------------
Clause (F) of Section 6(h)(3) of the Act \28\ requires that only a
broker or dealer subject to suitability rules comparable to those of a
national securities association registered pursuant to Section 15A(a)
of the Act \29\ effect transactions in a SFP. CME clearing members and
their correspondents are bound by the applicable sales practice rules
of the National Futures Association (``NFA''), which is a national
securities association. As such, the sales practice rules of NFA are,
perforce, comparable to those of a national securities association
registered pursuant to Section 15A(a) of the Act.\30\ Moreover, the
application of NFA sales practice rules is extended beyond the CME
clearing membership to the extent that NFA By-Law 1101 provides that
``[n]o member may carry an account, accept an order or handle a
transaction in commodity futures contracts for or on behalf of any non-
Member of NFA.''
---------------------------------------------------------------------------
\28\ 15 U.S.C. 78f(h)(3)(F).
\29\ 15 U.S.C. 78o-3(a).
\30\ 15 U.S.C. 78o-3(a).
---------------------------------------------------------------------------
Clause (G) of Section 6(h)(3) of the Act \31\ requires that each
SFP be subject to the prohibition against dual trading in Section 4j of
CEA \32\ and the rules and regulations thereunder or the provisions of
Section 11(a) of the Act \33\ and the rules and regulations thereunder.
CME Rule 123 requires Exchange members to comply with all applicable
``provisions of the Commodity Exchange Act and regulations duly issued
pursuant thereto by the CFTC.''
---------------------------------------------------------------------------
\31\ 15 U.S.C. 78f(h)(3)(G).
\32\ 15 U.S.C. 4j.
\33\ 15 U.S.C. 78k(a).
---------------------------------------------------------------------------
Further, the prohibition of dual trading in SFPs per Regulation
Sec. 41.27 \34\ adopted pursuant to Section 4j(a) of CEA \35\ applies
to a contract market operating an electronic trading system if such
market provides participants with a time or place advantage or the
ability to override a predetermined matching algorithm. The Exchange
intends to offer SFPs on CME exclusively on its CME Globex electronic
trading platform. To the extent that the conditions cited above do not
exist in the context of the CME Globex system, the CME Rulebook
contains no specific rule relating to dual trading in an electronic
forum.
Clause (H) of Section 6(h)(3) of the Act \36\ provides that trading
in a SFP must not be readily susceptible to manipulation of the price
of such SFP, nor to causing or being used in the manipulation of the
price of any underlying security, option on such security, or option on
a group or index including such securities. CME believes that CME
Listing Standards are designed to ensure that CME SFPs and the
underlying securities would not be readily susceptible to price
manipulation. Under CME Rule 432, an activity ``to manipulate prices or
to attempt to manipulate prices'' is a ``major offense'' punishable,
per CME Rule 430, by ``expulsion, suspension, and/or a fine of not more
than $1,000,000 plus the monetary value of any benefit received as a
result of the violative action.''
---------------------------------------------------------------------------
\34\ 17 CFR 41.27.
\35\ 7 U.S.C. 6j(a).
\36\ 15 U.S.C. 78f(h)(3)(H).
---------------------------------------------------------------------------
Clause (I) of Section 6(h)(3) of the Act \37\ requires that
procedures be in place for coordinated surveillance amongst the market
on which a SFP is traded, any market on which any security underlying
the SFP is traded, and other markets on which any related security is
traded to detect manipulation and insider trading. The Exchange has
surveillance procedures in place to detect manipulation on a
coordinated basis with other markets. In particular, CME is an
affiliate member of the Intermarket Surveillance Group (``ISG'') and is
party to an affiliate agreement and an agreement to share market
surveillance and regulatory information
[[Page 39825]]
with the other ISG members. Further, CME is party to a supplemental
agreement with the other ISG members to address the concerns expressed
by the Commission with respect to affiliate ISG membership.\38\
Finally, CME Rule 424 permits CME to enter into agreements for the
exchange of information and other forms of mutual assistance with
domestic or foreign self-regulatory organizations, associations, boards
of trade, and their respective regulators.
Clause (J) of Section 6(h)(3) of the Act \39\ requires that a
market on which a SFP is traded have in place audit trails necessary or
appropriate to facilitate the coordinated surveillance referred to in
the preceding paragraph. The Exchange states that it relies upon its
Market Regulation Department and its large, highly trained staff to
actively monitor market participants and their trading practices and to
enforce compliance with CME rules. CME Market Regulation Department
staff is organized into Compliance and Market Surveillance Groups. In
performing its functions, CME Market Regulation Department routinely
works closely with CME Audit Department, CME Clearing House, CME Legal
Department, CME Globex Control Center, and CME Information Technology
Department.
---------------------------------------------------------------------------
\37\ 15 U.S.C. 78f(h)(3)(I).
\38\ See Securities Exchange Act Release No. 45956 (May 17,
2002), 67 FR 36740 (May 24, 2002) (joint CFTC and Commission rule
relating to cash settlement and regulatory halt requirements for
SFPs).
\39\ 15 U.S.C. 78f(h)(3)(J).
---------------------------------------------------------------------------
CME Compliance is responsible for enforcing the trading practice
rules of the Exchange through detection, investigation, and prosecution
of those who may attempt to violate those CME Rules. Further, CME
Compliance is responsible for handling customer complaints, ensuring
the integrity of the Exchange's audit trail, and administering an
arbitration program for the resolution of disputes. CME Compliance
employs investigators, attorneys, trading floor investigators, data
analysts, and a computer programming and regulatory systems design
staff.
CME believes that CME Market Regulation Department has created some
of the most sophisticated tools in the world to assist with the
detection of possible rule violations and monitoring of the market.
Among the systems it uses are the Regulatory Trade Browser (``RTB''),
the Virtual Detection System (``VDS''), the Reportable Position System
(``RPS''), and the RegWeb Profile System (``RegWeb''). These systems
include information on all CME Globex users, all transactions, large
positions, and statistical information on trading entities.
CME Market Surveillance is dedicated to the detection and
prevention of market manipulation and other similar forms of market
disruption. As part of these responsibilities, CME Market Surveillance
enforces the Exchange's position limit rules, administers the hedge
approval process, and maintains the Exchange's RPS system.
CME believes that the foundation of the CME Market Surveillance
program is the deep knowledge of its staff about the major users,
brokers, and clearing firms, along with its relationship with other
regulators. Day-to-day monitoring of market positions is handled by a
dedicated group of surveillance analysts assigned to specific
market(s). Each analyst develops in-depth expertise of the factors that
influence the market in question. The Exchange estimates that perhaps
90% of the market users at any single time are known to the Exchange.
Daily surveillance staff activities include:
Monitoring positions for size based on percentage of open
interest and historic user participation in each contract.
Aggregation of positions across clearing members with the
use of CME trade reporting systems to account for all positions held by
any single participant. CME believes that this daily review permits the
surveillance analyst to promptly identify unusual market activity.
As a contract approaches maturity, large positions are
scrutinized to determine whether such activity is consistent with prior
experience, allowing prompt regulatory intervention if necessary.
Analysts closely monitor market news through on-line and
print media.
Staff conducts on-site visits to large market participants
periodically.
CME Market Regulation staff investigates possible misconduct and,
when appropriate, initiates disciplinary action. CME Rule 430 empowers
the Exchange's disciplinary committees to discipline, limit, suspend,
or terminate a member's activities for cause, amongst other sanctions.
Further, per CME Rule 123, the Exchange requires its members to be
responsible for ``the filing of reports, maintenance of books and
records, and permitting inspection and visitation'' in order to
facilitate such investigations by Exchange staff.
CME Rule 536 requires that certain information be recorded with
respect to each order, including: Time entered, terms of the order,
order type, instrument and contract month, price, quantity, account
type, account designation, user code, and clearing firm. This
information may be recorded manually on timestamped order tickets,
electronically in a clearing firms system, or by entering the orders
with the required information into CME Globex immediately upon receipt.
A complete CME Globex electronic audit trail is archived and maintained
by CME for at least a five-year period. Clearing firms must also
maintain any written or electronic order records for a period of five
years.
Clause (K) of Section 6(h)(3) of the Act \40\ requires that a
market on which a SFP is traded have in place procedures to coordinate
trading halts between such market and any market on which any security
underlying the SFP is traded and other markets on which any related
security is traded. The Exchange filed with the Commission CME Rules
establishing a generalized framework for the trade of SFPs.\41\ In
particular, proposed CME Rule 71001.F. provides, in accordance with
Regulation Sec. 41.25(a)(2) of CEA,\42\ that ``[t]rading of Physically
Delivered Single Security Futures shall be halted at all times that a
regulatory halt, as defined per SEC Rule 6h-1(a)(3) and CFTC Regulation
Sec. 41.1(l), has been instituted for the underlying security.''
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\40\ U.S.C. 78f(h)(3)(K).
\41\ See SR-CME-2005-03.
\42\ 17 CFR 41.25(a)(2).
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Clause (L) of Section 6(h)(3) of the Act \43\ requires that the
margin requirements for a SFP comply with the regulations prescribed
pursuant to Section 7(c)(2)(B) of the Act.\44\ CME has margin rules in
place.\45\ Thus, CME believes that its customer margin rules are
consistent with the requirements of the Act.
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\43\ 15 U.S.C. 78f(h)(3)(L).
\44\ 15 U.S.C. 78g(c)(2)(B).
\45\ See Securities Exchange Act Release No. 46637 (October 10,
2002), 67 FR 64672 (October 21, 2002) (SR-CME-2002-01).
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For the reasons described above, CME believes that CME Listing
Standards submitted herewith satisfy the requirements set forth in
Section 6(h)(3) of the Act.\46\
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\46\ 15 U.S.C. 78f(h)(3).
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2. Statutory Basis
The Exchange believes that its proposed rule change, as amended, is
consistent with Section 6(b) of the Act,\47\ in general, and furthers
the objectives of Section 6(b)(5) of the Act,\48\ in particular, in
that it is designed to remove impediments to and perfect the mechanism
for a free and open market and a national market system, and, in
[[Page 39826]]
general, to protect investors and the public interest.
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\47\ 15 U.S.C. 78f(b).
\48\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CME does not believe that the proposed rule change, as amended,
would impose any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange has not solicited, and does not intend to solicit,
comments on this proposed rule change. The Exchange has not received
any unsolicited written comments from members or other interested
parties.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
The foregoing proposed rule change, as amended, has become
effective pursuant to Section 19(b)(7) of the Act.\49\ Within 60 days
of the date of effectiveness of the proposed rule change, as amended,
the Commission, after consultation with the CFTC, may summarily
abrogate the proposed rule change and require that the proposed rule
change be refiled in accordance with the provisions of Section 19(b)(1)
of the Act.\50\
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\49\ 15 U.S.C. 78s(b)(7).
\50\ 15 U.S.C. 78s(b)(1).
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IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File Number SR-CME-2005-03 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, Station Place, 100 F
Street, NE., Washington, DC 20549-9303.
All submissions should refer to File Number SR-CME-2005-03. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Section. Copies of
such filing also will be available for inspection and copying at the
principal office of CME. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-CME-2005-03 and should be submitted on or before August 1, 2005.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\51\
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\51\ 17 CFR 200.30-3(a)(12).
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Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3618 Filed 7-8-05; 8:45 am]
BILLING CODE 8010-01-P
