[Federal Register Volume 59, Number 239 (Wednesday, December 14, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-30691]
[[Page Unknown]]
[Federal Register: December 14, 1994]
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COMMODITY FUTURES TRADING COMMISSION
Chicago Mercantile Exchange Proposed Primary Market Maker Rule
Amendments
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of proposed rule amendments of the Chicago Mercantile
Exchange to establish a primary market maker system.
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SUMMARY: The Chicago Mercantile Exchange (``CME'' or ``Exchange'') has
submitted proposed rule amendments and other materials which would
establish a primary market maker system for certain CME futures and
options contracts.1 Acting pursuant to the authority delegated by
Commission Regulation 140.96, the Division of Trading and Markets has
determined to publish the CME proposal for public comment. The Division
believes that publication of the CME proposal is in the public interest
and will assist the Commission in considering the views of interested
persons.
\1\The CME proposal includes new Rule 556; amendments to
existing Rules 531, 533, and 539; and amendments to existing
interpretations and special notices under Rules 533 and 549.
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DATES: Comments must be received on or before January 13, 1995.
FOR FURTHER INFORMATION CONTACT: Clarence Sanders, Attorney, Division
of Trading and Markets, Commodity Futures Trading Commission, 2033 K
Street NW, Washington, DC 20581. Telephone: (202) 254-8955.
SUPPLEMENTARY INFORMATION:
I. Description of Proposed Rule Amendments
By a letter dated September 14, 1994, the CME submitted proposed
rule amendments pursuant to Section 5a(a)(12)(A) of the Commodity
Exchange Act (``Act'') and Commission Regulation 1.41(b). The proposed
amendments would establish a primary market maker (``PMM'') system for
certain CME futures and options contracts.
Under the CME proposal, application of the PMM system would be
limited to new or low volume contracts. Initially, the CME would
implement the PMM system on a pilot basis for new contracts based on
equity securities. After completion of the pilot period, the PMM system
could be extended to other new or low volume contracts.
Eligibility for appointment as a PMM would be limited to members of
the CME. A member's appointment, and the related rights and duties of
an appointee, would be confined to one or more designated contracts.
Applicants for appointment would be required to have the greater of net
capital of $250,000 or an amount sufficient to assume a position of
twenty trading units in the designated contract(s). An appointee would
be required (i) to maintain a two-sided market in the form of current
bid and ask price quotations at a maximum spread difference and (ii) to
satisfy bids or offers up to a specified quantity of contracts at the
appointee's current bid and ask prices.
A PMM also would serve as a floor broker and custodian of an order
book for customer limit orders. As custodian of the limit order book
(LOB), the PMM would be required to accept customer limit orders,
maintain those orders in the LOB, and effect their proper execution.
The PMM would be required to display bid and ask quotations of orders
placed in the LOB and to publicly disseminate market quotations. In so
doing, the PMM would be required to provide equal access to LOB depth
and size upon the request of a CME member. Although such disclosure is
required under the proposal, the CME has not indicated how this
information would be provided.
Customer orders placed with the PMM for inclusion in the LOB would
have priority over, and would be executed in advance of, other
competing orders. In executing transactions for his own account as
market maker, a PMM would be required to accord priority to those
customer orders or other member orders the PMM represents as a floor
broker or as custodian of the LOB.
A PMM would have a right of participation in orders executed at his
disseminated bid and ask quotations. The right of participation would
take the form of a priority over competing bids or offers at prices
equaling the PMM's bid or ask quotation. Although not expressly
included in the proposal, it appears that the PMM would be able to
exercise its market maker priority regardless of whether another member
first bid or offered for its own account at a price.
The magnitude of a PMM's right of participation would vary with the
level of trading in a designated contract. For a designated contract
with average daily volume of 2500 contracts or less, the PMM would have
a right to participate in 40 percent of the contracts transacted at the
PMM's bid or ask quotation. For a designated contract with average
daily volume of 2501 to 5000 contracts, the PMM's right of
participation would decline to 30 percent. For a designated contract
with average daily volume in excess of 5000 contracts, the PMM would
not have any right of participation.
Given that a PMM would function as a market maker and at the same
time conduct brokerage transactions, the proposal would permit the PMM
to facilitate the execution of customer orders by serving as a
counterparty on such orders.\2\ In this respect, the proposal includes
procedures permitting the execution of ``facilitation orders.'' Under
the proposal, facilitation orders would be defined as orders for the
account of the PMM or orders solicited by the PMM from members of the
trading crowd that are executed as a cross transaction with a customer
order.\3\
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\2\As part of the proposal, the existing CME rule prohibiting
trading against customer orders would be amended to permit the PMM
to engage in such transactions pursuant to the terms of the PMM
program.
\3\As part of the proposal, the existing CME rules that prohibit
pre-arranged trades and regulate the crossing of orders for
different customers by the same floor broker would be revised to
permit the PMM to engage in such transactions pursuant to the terms
of the PMM program.
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Procedures for the execution of facilitation orders would require
the PMM to first request bids or offers for the execution of such
customer orders from other market participants. The PMM would then be
required on behalf of the customer order to bid at a price above the
highest market bid or to offer at a price below the lowest market
offer, to identify to the trading crowd that the customer order is
being bid or offered subject to facilitation, and to disclose all terms
and conditions of such order. After all other market participants were
given an opportunity to meet the PMM's bid or offer made on behalf of
the customer order, the PMM would be permitted to cross all or any
remaining part of the customer order against the facilitation order by
announcing in open outcry the quantity and price of the order being
crossed. Once the PMM made this announcement, the customer order would
have precedence over any other bid or offer in the trading crowd for
execution against the facilitation order. The facilitation order would
have priority for execution against the customer order subject to LOB
priorities.\4\
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\4\The Commission notes that these procedures for facilitation
orders appear to be materially different than those called for by
Commission Regulation 1.39 and current CME rules. Specifically,
Regulation 1.39 requires the presence of an Exchange official and
CME rules require that crossed orders be pre-announced three times.
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A newly appointed PMM would serve continuously until trading
activity in the designated contract reached a level of 5000 contracts
per day. Thereafter, the term of a PMM appointment would continue to
run for an additional five years, during which time the PMM would
continue to serve as custodian of the LOB. A PMM appointment could be
transferred only with the approval of the Board of Directors of the
CME.
Except for the right of participation conferred on a PMM appointee,
the PMM system would not limit the trading activities of other floor
members in designated contracts. Other floor members would have access
to designated contracts for purposes of conducting proprietary and
brokerage transactions. With respect to brokerage transactions, other
floor members would be permitted to accept for execution both market
and limit orders of customers. Notwithstanding that the proposal would
establish a LOB under the custodianship of a PMM appointee, and provide
orders placed therein with a trade priority, the PMM system would not
prohibit other floor members from accepting customers' limit orders for
execution.
The proposal would prohibit any affiliate of a PMM from purchasing
or selling any contract to which such PMM was appointed except to
reduce or liquidate an existing position pursuant to notice to the CME.
However, the proposal would permit the CME to grant an exemption from
this prohibition subject to CME approval of procedures restricting the
flow of material non-public information between the PMM and the
affiliated person(s). The proposal also would revise an existing CME
interpretation prohibiting ``frontrunning'' in connection with the CME
Large Order Execution (``LOX'') program. The CME interpretation
applicable to the LOX program would be revised to include orders
executed under the PMM program.
II. Request for Comments
The Commission requests comments on any aspect of the CME's
proposed rule amendments that members of the public believe may raise
issues under the Act or Commission regulations. In particular, the
Commission requests comments regarding the suitability of the order
disclosure provisions, the impact on competitive trading conditions,
the priority afforded orders held in the LOB but not obtained by orders
held by floor brokers, whether there would be adequate protection of
customer trade executions, the implications for customer protection
under the proposed facilitation procedures as compared to current order
crossing procedures, and whether any other conditions or requirements
should be imposed on the proposal.
Copies of the proposed rule amendments and related materials are
available for inspection at the Office of the Secretariat, Commodity
Futures Trading Commission, 2033 K Street NW, Washington, DC 20581.
Copies also may be obtained through the Office of the Secretariat at
the above address or by telephoning (202) 254-6314. Some materials may
be subject to confidential treatment pursuant to 17 CFR 145.5 or 145.9.
Any person interested in submitting written data, views, or
arguments on the proposed rule amendments should send such comments to
Jean A. Webb, Secretary, Commodity Futures Trading Commission, 2033 K
Street NW, Washington, DC 20581, by the specified date.
Issued in Washington, DC, on December 8, 1994.
Alan L. Seifert,
Deputy Director.
[FR Doc. 94-30691 Filed 12-13-94; 8:45 am]
BILLING CODE 6351-01-P
