[Federal Register Volume 61, Number 76 (Thursday, April 18, 1996)]
[Notices]
[Pages 16899-16902]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-9506]
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COMMODITY FUTURES TRADING COMMISSION
Trading and Clearing Link Between the Chicago Board of Trade and
the London International Financial Futures and Options Exchange
AGENCY: Commodity Futures Trading Commission.
ACTION: Notice of the proposed trading and clearing linkage for certain
financial products between the Chicago Board of Trade and the London
International Financial Futures and Options Exchange and proposed rules
and rule amendments to implement the linkage.
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SUMMARY: The Chicago Board of Trade (``CBT'' or ``Exchange'') has
submitted a proposal to implement a trading and clearing link
(``Link'') with the London International Financial Futures and Options
Exchange (``LIFFE''). Pursuant to the Link, CBT and LIFFE would trade
their major financial futures and options contracts on each other's
floors by open outcry. Effectively, the link would permit ``cross
listing'' of CBT and LIFFE futures contracts. Market users could
establish a position in a LIFFE-designated contract in Chicago which
would be transferred to The London Clearing House (``LCH'') the same
day and be recognized as a LIFFE position. Market users could also
establish a position in a CBT-designated contract in London which would
be transferred to the Board of Trade Clearing Corporation (``BOTCC'')
the same day and be recognized as a CBT position. Conceptually, a CBT-
designated contract would be executed on LIFFE, initially matched by
LCH, and then transferred to BOTCC for clearing and vice-versa. All
contracts traded through the Link would be completely fungible. Acting
pursuant to the authority delegated by Commission Regulation 140.96,
the Division of Trading and Markets has determined to publish the
proposal for public comment. The Division believes that publication of
the proposal is in the public interest and will assist the Commission
in considering the views of interested persons.
DATES: Comments must be received on or before May 20, 1996.
FOR FURTHER INFORMATION CONTACT: Lois Gregory, Attorney, Division of
Trading and Markets, Commodity Futures Trading Commission, Three
Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581.
Telephone: (202) 418-5483.
[[Page 16900]]
SUPPLEMENTARY INFORMATION:
I. Description of Proposal
By letters dated July 28, 1995 through March 1, 1996, CBT submitted
a proposal, including proposed new rules and rule amendments, for
Commission approval under Section 5a(a)(12)(A) of the Commodity
Exchange Act (``Act'') and Commission Regulation 1.41(b) to implement a
trading and clearing Link with the LIFFE. CBT states that, through the
Link, it and LIFFE intend to provide more extensive risk transfer
opportunities for their members and users of the markets, and to
facilitate price discovery for the benefit of persons who rely on
internationally disseminated price information.
A. Contracts and Hours
Under the Link, CBT and LIFFE would trade their major financial
futures and options contracts on each other's floors by open outcry.
Market users could establish a position in a LIFFE-designated contract
in Chicago which typically would be transferred to LCH the same day and
be recognized as a LIFFE position. Markets users could also establish a
position in a CBT-designated contract in London which typically would
be transferred to BOTCC the same day and be recognized as a CBT
position. All open positions in contracts traded under the proposal
automatically would transfer from the executing exchange to the
``home'' exchange at the end of the trading day.1
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\1\ Options could be exercised only after being transferred to
the home exchange. All deliveries would be at the home exchange.
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At the commencement of the Link, CBT would list for trading futures
and options on LIFFE's German Government Bond contract and LIFFE would
list for trading futures and options on the CBT's U.S. Treasury Bond
contract.2 The CBT has proposed to amend its German government
bond futures and option contracts to be fungible with the corresponding
LIFFE contracts.3
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\2\ CBT and LIFFE also propose eventually to have CBT's ten and
five year U.S. Treasury Note futures and options contracts
introduced for trading on LIFFE and futures and options on LIFFE's
Long-Term British Gilts and Italian Government Bonds introduced for
trading on the CBT.
\3\ Likewise, LIFFE would have contracts which would be fungible
with CBT contracts.
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All contracts traded through the Link would be completely fungible.
Accordingly, to accomplish this, the CBT would modify the terms and
conditions of its contracts which would be traded on both the CBT and
LIFFE so that they would be identical to those of the LIFFE
contracts.\4\
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\4\ In its rules, the CBT's contracts traded on the Link are
referred to as ``LIFFE designated contracts trading on CBT''.
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The products would have the following open outcry trading day at
the two exchanges (central daylight savings time/location of trading in
bold):
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Chicago London
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Treasury Bonds:
CBT.................................. 6:20 p.m.-9:05 p.m.......... 12:20 a.m.-3:05 a.m.
LIFFE................................ 1:30 a.m.-7:00 a.m.......... 7:30 a.m.-1:00 p.m.
CBT.................................. 7:20 a.m.-2:00 p.m.......... 1:20 p.m.-8:00 p.m.
German Bunds:
CBT.................................. 6:20 p.m.-9:05 p.m.......... 12:20 a.m.-3:05 a.m.
LIFFE................................ 1:30 a.m.-10:15 a.m......... 7:30 a.m.-4:15 p.m.
CBT.................................. 10:20 a.m.-2:00 p.m......... 4:20 p.m.-8:00 p.m.
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There would be time breaks between the cessation of trading on the
LIFFE and the trading resumption of Link products on the CBT to provide
for an orderly transition from one market place to the other. There
would be no overlap in open outcry trading in the contracts between the
two exchanges.
Each exchange has an electronic trading system \5\ and each
initially would operate its system during a portion of the other's
open-outcry sessions. However, when linkage volume reached a specified
level, electronic trading would be turned-off during open-outcry
sessions for the linkage contracts.
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\5\ CBT's electronic trading system is known as Project A. LIFFE
operates the Automated Pit Trading system, referred to as ``APT.''
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B. Trading and Clearing
The Link is designed to allow market users to enter and leave the
market without regard to whether their trades are executed in London or
Chicago, and to permit a contract executed at the executing exchange to
be transformed into the contract of the home exchange upon its transfer
to the home clearinghouse. Each day under the Link, each clearing
member's gross long and gross short open position balance in LIFFE-
designated contracts traded on CBT would be transferred at CBT's
closing price to the account of a LIFFE clearing member counterpart via
LCH for clearing and settlement. Transactions initially would be
matched by BOTCC, but upon transfer to LCH, would be converted to a
LIFFE futures or option contract and then confirmed to the customer as
such at the trade price determined on the CBT floor. Similarly, each
LCH clearing member's gross long and gross short open position balance
in CBT-designated contracts traded on LIFFE would be transferred at
LIFFE's closing price to the account of a CBT clearing member
counterpart via BOTCC for clearing and settlement. Transactions
initially would be matched by LCH, but upon transfer to BOTCC would be
converted to a CBT futures or option contract at the trade price
determined on the LIFFE floor.
Market participants also would have the option of having daytrade
positions entered into on the executing exchange offset prior to
transfer thereby reducing associated costs. A market participant also
could have a position open at the home exchange offset by a designated
link position that has been transferred.
The clearing organization for the executing exchange would be
responsible for trades up until the moment they were transferred to the
home clearing organization. At the moment of the transfer of positions,
the home clearing organization would be responsible and the clearing
guarantee of that organization would attach. The home clearing
organization would guarantee the other side of the market in the same
manner and with the same resources used to guarantee transactions
executed on the home exchange. Open positions in linkage contracts
could not be transferred from the executing exchange to the home
exchange on holidays at the home exchange. In those cases, all
transactions would continue to be held by the executing exchange until
the home exchange's next business day.
Firms which executed trades for LIFFE-designated products in
Chicago would be required to be an LCH clearing member or enter into a
Link clearing agreement with a single LCH clearing
[[Page 16901]]
member. Likewise, firms who executed trades for CBT-designated products
in London would be required to be BOTCC clearing members or enter into
a Link clearing agreement with a single BOTCC clearing member. These
agreements would require the receiving clearing member to accept the
transferor's entire open position balance, except in accordance with
specified criteria for rejection, such as, for example, the bankruptcy
of the transferor or the termination of its rights to act as a clearing
member. In order to trade under the Link, a non-clearing member of
either exchange would have to have clearing arrangements for designated
contracts trading with a home exchange clearing member that has entered
into a relevant Link clearing agreement.
Contracts traded under the Link would be added to the contract's
existing open interest on the home exchange. Link contract volume would
be recorded by the executing exchange. With respect to positions
transferred through the Link, the home exchange and clearing
organization would be entitled to charge their respective fees, but at
rates no higher than those normally charged. The home exchange and
clearing organization would not impose fees on trades which were not
transferred through the Link, i.e., daytrades offset on the executing
exchange. If the average daily trading volume for a contract traded on
the executing exchange was more than 20% of the average daily trading
volume on the home exchange for the same period, the parties could take
whatever action deemed appropriate, including suspending trading over
the Link of that particular contract. The contract would then be traded
only on the home exchange, with open interest, of course, attributable
to the home exchange.
C. Margin
Both BOTCC and LCH would collect margin to minimize the risk of
carrying positions executed under the Link. For LIFFE-designated
contracts traded on CBT, BOTCC would transfer the day position balance
to LCH at CBT's 2:00 p.m. closing price on trade day, ``T''. Transfer
would take place between 4:00 p.m. and 5:00 p.m., Chicago time, and
BOTCC would calculate a variation on all LIFFE-designated positions it
had cleared for the trading day against its closing prices. LCH would
receive the transferred positions at CBT's closing price and calculate
a variation against its own earlier close-of-market settlement price.
Although bank commitments would have been received earlier, each
clearing house actually would collect the variation on T+2.\6\
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\6\ This variation would be collected on T + 1 for futures and
options on Long-Term British Gilts. See footnote 2, supra.
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For CBT-designated contracts trading on LIFFE, LCH would transfer
open positions to BOTCC at approximately 10:00 a.m., Chicago time.
Positions would be transferred at the LCH closing price and LCH would
calculate variation based on this price and would collect on T+1. BOTCC
would determine the settlement price based on its afternoon close and
would calculate and collect variation on the transferred positions as
part of its routine, mid-day variation call. Each home clearing firm
would reimburse each executing clearing firm for the variation paid to
the executing clearing organization. Conversely, each home clearing
firm would receive from the executing clearing firm any variation paid
by the executing clearing organization.
For CBT-designated option contracts purchased on LIFFE, LCH would
collect the full option premium. So that linked contracts would be
fully fungible and to avoid pricing discrepancies, CBT proposes,
pursuant to Commission Regulation 33.11, that the Commission exempt
LIFFE-designated options purchased on CBT from the requirement of
Commission regulation 33.4(a)(2) 7 and allow them to be margined
futures-style.
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\7\ Commission Regulation 33.4(a)(2) requires that the full
amount of each option premium be received from each option customer
at the time the option is purchased.
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BOTCC and LCH would collect original margin on a position executed
on the executing exchange when the day after the trade day was a
holiday for the home clearing organization. Transfer of funds and
positions would resume on the next business day. BOTCC would also
collect original margin for LIFFE-designated positions it held
overnight from its evening trading session.
LIFFE-designated contracts would be traded and settled in various
currencies. CBT-designated contracts would be traded and settled in
U.S. dollars.
The Link is intended to be seamless to customers. To aid in this
endeavor, CBT proposes that contracts traded under the Link be subject
to consistent segregation treatment before and after funds and
positions were transferred from the executing exchange to the home
clearing organization. U.S. customer funds associated with contracts
executed on LIFFE normally would be subject to Commission Regulation
30.7 and customer funds associated with contracts executed on CBT
normally would be subject to Section 4d of the Act. CBT proposes that
customer funds used to secure positions in CBT-designated contracts
traded on LIFFE be held by U.S. clearing firms under Section 4d of the
Act before as well as after those positions were transferred to BOTCC.
Customer funds used to secure positions in LIFFE-designated contracts
traded on CBT would be classified as Commission Regulation 30.7 funds
before as well as after those positions were transferred to LCH.8
The parties anticipate this would avoid potential operational
difficulties and accounting problems, fulfill customer expectations
that funds and positions would be held in the manner required in the
location where the ultimate clearing organization is located, and
further the concept of full fungibility of contracts.
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\8\ The Commission is exploring the appropriate treatment of
CBT-designated positions for the period held in the United Kingdom
to assure appropriate protection of U.S. based segregation deposits.
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Deliveries and options exercises of all linkage contracts would
take place through the home exchange and in accordance with the
requirements of the home exchange. All deliveries in U.S. Treasury
products would occur through BOTCC and its clearing members. All
deliveries in LIFFE contracts would occur through LCH and its clearing
members.
D. Oversight
Linkage contracts would be traded under the rules of the executing
exchange. Therefore, the trading of LIFFE-designated contracts on CBT
would be subject to CBT rules and regulations. Exchange-for-physical
(``EFP'') transactions on CBT-designated contracts would continue to be
submitted to BOTCC. EFPs would not be permitted on LIFFE-designated
contracts. CBT would not operate any system of price limits or operate
an average pricing system with respect to LIFFE-designated contracts.
Crossing of transactions on the executing exchange could be permitted,
but only in a manner which conformed with the rules of the home
exchange.
Proposed CBT rules would provide that it would be an act
detrimental to the interest and welfare of CBT for a member to be found
by LIFFE to have committed a material violation of LIFFE's rules, and
any CBT member sanctioned by LIFFE could be suspended until the
sanction was satisfied.
The parties would share information to enable effective
surveillance and investigations related to designated linkage
contracts. Each exchange and its
[[Page 16902]]
clearing house would be entitled to take such action under its rules to
deal with a market emergency as it in its discretion deemed fit and
would consult with all other parties on the matter as soon as
practicable.
II. Request for Comments
The Commission requests comments from interested persons concerning
any aspect of the proposed trading and clearing link between the CBT
and LIFFE that commenters believe raises issues under the Act or
Commission regulations.
Copies of the proposed rules, illustrations of accounting detail
for transfer of positions and funds and other related materials are
available for inspection at the Office of the Secretariat, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street,
N.W., Washington, D.C. 20581. Copies also may be obtained through the
Office of the Secretariat at the above address or by telephoning (202)
418-5100. 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 proposal or proposed new rules or rule amendments
should send such comments to Jean A. Webb, Secretary, Commodity Futures
Trading Commission, Three Lafayette Centre, 1155 21st Street, NW.,
Washington, DC 20581 by the specified date.
Alan L. Seifert,
Deputy Director.
[FR Doc. 96-9506 Filed 4-17-96; 8:45 am]
BILLING CODE 6351-01-P
