97-30806. Application of FutureCom, LTD. as a Contract Market in Live Cattle Futures and Options

[Federal Register Volume 62, Number 226 (Monday, November 24, 1997)]
[Notices]
[Pages 62566-62568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-30806]


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COMMODITY FUTURES TRADING COMMISSION


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

AGENCY: Commodity Futures Trading Commission.

ACTION: Notice of application.

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SUMMARY: FutureCom has applied for designation as a contract market for 
the automated internet-based trading of cash-settled live cattle 
futures and options. FutureCom has not previously been approved by the 
Commission as a contract market in any commodity, thus, in addition to 
the terms and conditions of the proposed futures and options contracts, 
FutureCom has also submitted proposed trading rules, rules of 
government, and other materials to meet the requirements for a board of 
trade seeking initial designation as a contract market. Notice of 
FutureCom's application was previously published for public comment on 
January 31, 1997 (62 FR 4730). Many comments received in response to 
that notice expressed the opinion that there were insufficient 
materials and information available concerning the applicant, thus 
commenters were unable to respond adequately to the request for 
comment. Since the initial publication, the Commission has received 
additional materials and information in support of the application. 
Acting pursuant to the authority delegated by Commission Regulation 
140.96, the Division of Trading and Markets (``Division'') has 
determined to again publish the proposal for public comment. The 
Division believes that publication of the proposal for comment at this 
time is in the public interest, will assist the Commission in 
considering the views of interested persons, and is consistent

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with the purposes of the Commodity Exchange Act. The Division seeks 
comment regarding all aspects of FutureCom's application and addressing 
any issues commenters believe the Commission should consider.

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

FOR FURTHER INFORMATION CONTACT: With respect questions about the terms 
and conditions of the proposed futures and option contracts, please 
contact Fred Linse of the Division of Economic Analysis, Commodity 
Futures Trading Commission, at Three Lafayette Centre, 21st Street NW, 
Washington, DC 20581; Telephone: [phone]; Facsimile number: 
[phone]; or Electronic mail: [e-mail]. With respect to 
questions about the trading rules and rules of government, please 
contact Lois Gregory, Division of Trading and Markets, at the same 
address; Telephone: [phone]; Facsimile number: [phone]; 
or Electronic mail: [e-mail].

SUPPLEMENTARY INFORMATION:

I. Description of Proposal

    FutureCom, LTD., a limited Texas partnership, has applied for 
designation as a contract market for the automated trading over the 
internet of cash-settled live cattle futures and options. FutureCom has 
not been approved previously by the Commission as a contract market in 
any commodity, thus, in addition to the terms and conditions of the 
proposed futures and options contracts, FutureCom has also submitted 
proposed trading rules, rules of government, surveillance and 
compliance procedures, system security documentation, and other 
materials and documents to meet the requirements for a board of trade 
seeking initial designation as a contract market.
    Notice of FutureCom's application was previously published for 
public comment on January 31, 1997 (62 FR 4730). Many comments received 
in response to that notice expressed the opinion that there were 
insufficient materials and information concerning the applicant 
available at that time, thus commenters were unable to respond 
adequately to the request for comment. By letter dated June 20, 1997, 
the Division informed FutureCom that the running of the one-year review 
period provided in Section 6 of the Commodity Exchange Act would be 
stayed with respect to both the proposed futures and the proposed 
option contract until the Commission received information which fully 
addressed several major subject areas outlined in the letter. Since the 
initial publication, the Commission has received a considerable amount 
of additional material and information in support of the application. 
Based on the adequacy of the information contained in the submissions 
received to date, the Division has determined to lift the stay of the 
one-year review period and to publish again the proposal for public 
comment. The Division believes that publication of the proposal for 
comment again at this time is in the public interest, will assist the 
Commission in considering the views of interested persons, and is 
consistent with the purposes of the Commodity Exchange Act.
    FutureCom's affairs are managed under the direction of its Board of 
Directors and it will operate on a for-profit basis. FutureCom has 
proposed Bylaw provisions intended to meet requirements of various 
Commission regulations concerning the composition of governing boards 
and disciplinary committees. The FutureCom Board has the authority to 
establish classifications of membership and the qualifications that an 
applicant for membership must meet.
    Each FutureCom member would have to maintain minimum net worth 
requirements applicable to the member's FutureCom membership 
classification. Every member would be a clearing member of the 
Exchange. Any member not in compliance with minimum financial 
requirements would not be able to engage in transactions except to 
close out positions.
    FutureCom's proposed Bylaws also address trading standards, 
clearing and settlement, disciplinary proceedings, and arbitration. 
Trades would be matched in accordance with a trade matching algorithm 
based on a price-time priority. Traders could enter four types of 
orders: market, limit, stop, and market-if-touched. The trading 
standards would require each member to maintain records in accordance 
with Commission regulations. Bylaws would govern exchange of futures 
for physicals and position limits. Position limits would vary by 
trading level assigned to each member. Trading levels would be assigned 
based upon FutureCom's analysis of the credit risks associated with 
each applicant.
    Each member would enter into an account and clearing agreement with 
FutureCom which would set forth, among other things, the details of the 
clearing arrangement, initial margin, margin calls, default, 
liquidation, trading and clearing fees, and order entry. All orders 
entered into the FutureCom system would be cleared and settled 
immediately upon execution through the First National Bank of Amarillo 
(the ``Clearing Bank'') via a system of automatic electronic debits and 
credits among traders' accounts. FutureCom and the Clearing Bank have 
entered into a cash settlement procedures agreement and a custody 
agreement. Initial margin for any order would have to be on deposit 
with the Bank before any transaction was executed. Maintenance margin 
notices would be sent by electronic mail and would specify the date, 
time and amount due and members would be responsible for receiving and 
assuring that funds were available to fund an electronic debit. 
FutureCom would liquidate any position or positions upon any condition 
of default including failure of a member to meet any margin call.
    In the event of a trader default on a margin call, that margin 
would be delivered by FutureCom to the Clearing Bank on the day the 
default occurred. FutureCom intends to keep at least one million 
dollars in the form of a letter of credit on hand with the Clearing 
Bank for each listed futures and option contract. The amount would be 
increased according to the open interest in the listed contract to up 
to eight million dollars for open interest over 80,000 contracts. 
Additionally, FutureCom will accrue a reserve fund to be held by the 
Clearing Bank in a separate reserve fund account and be available 
against member defaults. From the transaction fees assessed in 
connection with each trade, the Exchange will apply $1.00 per contract 
to the reserve fund. Losses from trader defaults exceeding the 
FutureCom guarantee would be borne pro rata by all members according to 
the number of outstanding open contracts on the day of the default.
    FutureCom expects that generally, all members including those 
members that otherwise maintain an account with an FCM, will enter 
transactions on FutureCom directly. However, in some cases, FutureCom 
members may, for a variety of reasons, prefer their FCM or other 
intermediary, such as their commodity trading advisor, to enter orders 
into the FutureCom system on their behalf. Any such intermediary, if 
not a FutureCom member itself, would have to be approved and accepted 
by FutureCom as an intermediary for the purpose of entering orders into 
the trading system.\1\ The member would

[[Page 62568]]

give the FCM his I.D. and password for the purpose of entering the 
order as instructed by the member.
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    \1\ Every member would be required to register the computer(s) 
he/she/it intended to use to enter orders into FutureCom. Likewise, 
any intermediary entering orders on behalf of a member would be 
required to have the computer used to enter FutureCom orders 
registered with FutureCom. Only orders from properly registered and 
approved computers would be accepted into the FutureCom trading 
system.
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    The Bylaws prohibit the entering of transactions designed to take 
advantage of orders entered for another. These prohibitions include any 
transaction that had been directly or indirectly prearranged, ones that 
are in the nature of a wash sale, trading ahead, or the disclosing or 
withholding of orders. FutureCom asserts, however, that generally, it 
should be far more difficult, if not impossible, for many of the types 
of unlawful trade practices to occur due to the fact that the 
predominant number of orders will be entered directly by the member.
    FutureCom represents it will use due diligence in maintaining a 
continuing affirmative action program to secure compliance with various 
provisions of the Commodity Exchange Act and Commission regulations and 
with its own Bylaws. This will include trade practice and market 
surveillance programs designed and described by FutureCom to detect the 
trade practice abuses mentioned above as well as market manipulation, 
investigations of alleged violations of other rules, and disciplinary 
procedures. FutureCom's proposed Compliance Procedures require all 
intermediaries entering orders on behalf of members to comply fully 
with the requirements of Commission Regulation 1.35(a-1) consistent 
with the Commission's advisory relating to alternative methods of 
compliance with written record requirements.\2\ FutureCom expects these 
records to be generated electronically in connection with the order 
entry process.
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    \2\ ``Alternative Method of Compliance With the Written Record 
Requirements,'' 62 FR 7675 (February 20, 1997).
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    FutureCom intends to ask the National Futures Association (``NFA'') 
to administer FutureCom's financial surveillance and arbitration 
programs and examine the books and records of joint FutureCom-NFA 
members relating to the members' business of dealing in commodity 
futures and options and cash commodities insofar as such business 
relates to their dealing on FutureCom. In this regard, therefore, NFA 
would assume the responsibilities of FutureCom set forth in Commission 
Regulations 1.51(a)(3) and 1.52(c) for all FCMs that are members of 
both FutureCom and NFA. Concerning arbitration, Commission Regulation 
180.3(b)(4) requires each Commission registrant to include a registered 
futures association on a list of organizations that are qualified to 
conduct customer arbitration proceedings. As NFA is required to accept 
appropriate demands for arbitration, there is no need for a written 
agreement between FutureCom and NFA regarding delegation of FutureCom's 
arbitration program to NFA.
    The Commission's Office of Information Resources and Management has 
reviewed the security of the proposed FutureCom trading system and 
analyzed issues of system vulnerability and issues related to the 
operation of the electronic trading system.

II. Request for Comments

    Any person interested in submitting written data, views, or 
arguments on the proposal to designate FutureCom should submit their 
views and comments by the specified date to Jean A. Webb, Secretary, 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581. In addition, comments may be sent by 
facsimile transmission to facsimile number [phone], or by 
electronic mail to [e-mail]. The Division seeks comment on 
all aspects of FutureCom's application for designation as a new 
contract market that would permit transmittal of orders over the 
internet and match orders electronically. Comments should also include 
the proposed clearing and settlement procedures, the ability of 
FutureCom to fulfill its self regulatory duties, and any other issues 
commenters believe the Commission should consider. Reference should be 
made to the FutureCom application for designation as an automated 
contract market for live cattle futures and options. Copies of the 
proposed terms and conditions, Exchange rules, compliance procedures, 
clearing and settlement description, and other related materials are 
available for inspection at the Office of the Secretariat at the above 
address. Copies also may be obtained through the Office of the 
Secretariat at the above address or by telephoning [phone]. Some 
materials may be subject to confidential treatment pursuant to 17 CFR 
145.5 or 145.9. Requests or copies of such materials should be made to 
the FOI, Privacy and Sunshine Act Compliance Staff of the Office of the 
Secretariat at the Commission headquarters in accordance with 17 CFR 
145.7 and 145.8.

    Issued in Washington, DC, on November 18, 1997.
Alan L. Seifert,
Deputy Director.
[FR Doc. 97-30806 Filed 11-21-97; 8:45 am]
BILLING CODE 6351-01-M