Client Management Advisory Notice
From | Client Management
Subject | Urgent Notice: Block Trading for Futurtes Contracts
Effective Date | 11/27/00
Notice Number | CM#0049
Effective with the commencement of the GLOBEX session on Tuesday, November 28, 2000 (for trade date of Wednesday, November 29, 2000), the CME will implement block trading for selected futures markets including Eurodollars and some stock index contracts only. Firms will be able to block trade spreads and combination trades and report them via the Clearing 21 EFP System. A block transaction is similar to an EFP. It is a privately negotiated transaction at minimum lot size of 50 contracts. It is available for trading 24 hours a day. Eligible Contracts and Minimum Quantities Futures contracts eligible for Block Trading and their Minimum Block Transaction Quantities are displayed in the chart below.
Eligible Futures Contracts | Minimum Quantity
Eurodollar Futures | 2,000 futures contracts � limited to the 1 st four quarterly contract months and to serial months
Futures on S&P MidCap 400, Russell 2000, S&P/Barra Growth, S&P/Barra Value, FORTUNE e-50, Nikkei 225 | 50 futures contracts
Entry of Block Trade Futures On the C21 EFP Market Maker Trade Entry screen, the executing firm, or market maker, will distinguish the entry of Block Trades from regular spread/combinations by entering a Trade Type of "9" (versus spread type 6) and a new Order Type of "B". This trade type and the new order wil also be included on the TREX confirmation records that are transmitted via MQM to all firms that accept confirmations. Likewise, accepting firms should note the order "B" on the C21 EFP Trade Acceptance screen. Their TREX MQM confirmation records from the EFP system will also include the Order Type "B". Bookkeeping Changes Service Bureaus/Software Vendors and member firm systems managers will need to make the appropriate programming changes to recognize this new Order Type "B" for block trades as it relates to your bookkeeping systems. At this time, Block traded EFP transactions should not be entered via firms trade entry systems. A copy of the Special Executive Report including the Q&A on block trading is attached. If you have any questions regarding block trading for futures, please contact Lisa Amato, Client Management, at (312) 338-2654. Thank you. S-3649 November 10, 2000 Block Trading in Selected Markets to Commence November 28 th The Chicago Mercantile Exchange will introduce block trading in selected futures markets including Eurodollars and some stock index contracts effective with the commencement of the GLOBEX � session on the evening of Tuesday, November 28, 2000 (for a trade date of November 29 th ). The following questions and answers (Q&A) explain the execution, reporting, and submission of block trades. Q1: What is a block transaction? A1: It is a privately negotiated futures transaction executed apart from the public auction market. A block transaction may be executed either on or off the Exchange trading floor. These trades are governed by CME Rule 526, BLOCK TRANSACTIONS. See the Appendix to this document for the language of Rule 526. Q2: How does a block transaction differ from an All-or-None ("AON") transaction - or from an EFP transaction? A2: An AON transaction is executed by open outcry in a designated area on the trading floor. A block transaction may be executed privately on or off the trading floor provided that all other requirements of Rule 526, BLOCK TRANSACTIONS, are fulfilled. An EFP entails the simultaneous exchange of a futures position for a corresponding cash position (i.e., a basis trade) while a block transaction involves only futures. Q3: What products currently are eligible for block transactions? A3: The CME has received approval from the CFTC to implement a one-year pilot program permitting block transactions in various markets. For a detailed enumeration of markets where block trading will initially be permitted, please refer to the table "Minimum Block Transaction Quantities" below. The Exchange will be limiting the program to block transactions in futures at this time � block trading in options will be made available at a date to be announced subsequently. Q4: What are the minimum transaction quantities? A4: The minimum quantities for block transactions are determined by the Board of Directors and are subject to CFTC approval. The minimum quantities for block trades in various markets are indicated in the table below. These minimum order size requirements refer to the order size for individual instruments and recognized spreads or combinations. For example, a two legged calendar spread in Eurodollar futures may be block traded given a a minimum order size of 1,000 contracts in each leg of the spread � or 2,000 contracts to comprise the spread. Similarly, one may block trade a 500-lot front-year bundle in Eurodollars � for a total of 2,000 contracts on the ticket. These minimum order quantity requirements are applicable to single accounts or groups of eligible accounts. Minimum Block Transaction Quantities
| Minimum Quantity
Eurodollar Futures | 2,000 futures contracts � limited to the 1 st four quarterly contract months and to serial months
Futures on S&P MidCap 400, Russell 2000, S&P/Barra Growth, S&P/Barra Value, FORTUNE e-50, Nikkei 225 | 50 futures contracts
Q5: Who may participate in block transactions? A5: Eligible participants in block transactions are delineated in Part 36.1 of CFTC Regulations. Such eligible participants include Exchange members and member firms, broker/dealers, government entities, pension funds, commodity pools, corporations, investment companies, insurance companies, depository institutions, and high-net worth individuals. Further, Rule 526 provides for the participation of Commodity Trading Advisors (CTAs) and registered investment advisors - with net assets under management of at least $25 million � to conduct block transactions. See the Appendix to this document for the language of Rule 526. Q6: Can any order of the requisite size be executed as a block transaction? A6: No, the order must specifically be designated as block transaction eligible by the customer. Q7: What are the hours for block trading? A7: Block transactions may be executed any time. Q8: Are there any restrictions upon the transaction price of a block trade? A8: Block trades must be transacted at prices that are "fair and reasonable" in light of the size of the order, prices in related cash and futures markets and the circumstances of the participants. Further, the trade price must adhere to the minimum tick and price validation requirements of the market in question. Q9: What record keeping and audit trail requirements are attendant to a block trade? A9: The record keeping and audit trail requirements associated with a block trade are identical to the requirements associated with any other futures transaction. In addition to the normal record keeping and audit trail requirements, however, there is the additional proviso that a Block Trade Report shall be provided to the Exchange within 5 minutes of execution. Q10: What information must be included in the Block Trade Report - and to whom said information must be reported? A10: The Block Trade Report shall include: identification of the selling clearing member�s firm number, the buying clearing member�s firm number, the contract, contract month, transacted price, quantity and time of execution. If the block trade is executed off the trading floor or during hours outside of Regular Trading Hours, it may be reported to the GLOBEX Control Center ("GCC") by calling 312-456-2391. If the block trade is executed on the trading floor during Regular Trading Hours, it may be reported to Exchange price reporting staff in the Interest Rate quadrant on the upper trading floor (x2494); or, to Exchange price reporting staff in the Equity quadrant on the lower trading floor (x3935). Note that all block trades executed outside of Regular Trading Hours must be reported to the GCC. Q11: Block trades must be reported to the Exchange within 5 minutes of execution for the purposes of price dissemination - who is responsible for this Block Trade Report? A11: It is the responsibility of the seller (i.e., the seller�s clearing firm � not the buyer�s clearing firm) to provide the Block Trade Report � which shall be used for the purposes of price dissemination � in an effort to prevent duplicate reporting of the same transaction. (Both the seller�s and buyer�s clearing firm must also report the trade for the purposes of clearing as described in Question 16.) In the event that the seller is an individual member (e.g., on the trading floor), it is the individual member�s responsibility to provide the Block Trade Report. In the case of recognized spreads or combinations executed as a block transaction, the seller of the spread or combination is likewise responsible for reporting the transaction. Q12: Must block trades be "brokered" by an Exchange member or clearing member? A12: No - presuming that the clearing member(s) has so authorized, block transactions may be negotiated directly between non-member "eligible participants" (customers). In the event, however, that customers directly negotiate block trades, the affected clearing members are responsible for the timely capture and reporting of all required information including the time of execution. Clearing Members are urged to convey a clear understanding to their customers of their reporting responsibilities in this regard. Q13: Who is responsible for recording the execution time? A13: Ultimately, the clearing member is responsible for providing accurate execution times to the Exchange. Q14: Can spreads or combination trades be executed as block trades? A14: Yes - but all legs of the spread or combination must be within contracts for which block trading is permitted and conform to the minimum order quantity requirements. As such, recognized inter-market spreads or recognized combinations are permitted as long as all contracts involved are approved for block trading. For purposes of complying with the minimum order quantity restrictions, one may aggregate all legs of recognized intra- or inter-market spreads or combinations. Thus, all legs of a two-legged spread or combination, e.g., calendar spreads, may be aggregated to comply with the requirements. Similarly, all legs of any recognized 3-, 4- or multiple-legged spread or combination may be aggregated for the purposes of complying with the requirements. Q15: May eligible account managers use the post execution allocation procedure for blocktrades � as specified in Rule 536.E.? A15: Yes � for details, please refer to Rule 536., RECORDS FOR ORDERS AND PERSONAL TRANSACTIONS DURING REGULAR TRADING HOURS, Part E., Customer's Orders. Q16: What are the trade entry procedures for submitting block trades to the clearing system? A16: Block trades must be submitted through the Clearing 21 on-line EFP system. Block trades must be distinguished from EFPs by entering an order type "B" in the order type field on the entry screen. Consistent with the "seller" reporting procedure described in Question 11, the seller is responsible for inputting the trade and allocating it to the buyer. The buyer will then claim its side of the trade on the system�s claim screen. Upon a successful claim, confirmation records will be routed back to firms for bookkeeping purposes. Note that, when reporting spread transactions, each leg must be entered individually. Q17: May block trades be given-up? A17: Block trades may be given-up through the EFP system in the same manner as EFPs are currently given-up. Q18: Can orders be bunched to constitute one side of a block transaction? A18: Yes. Q19: What fees are associated with block transactions? A19: Block transactions shall be assessed a fee as determined by the Board of Directors. The Board has initially approved a $1.75/side surcharge per contract in addition to other fees normally applicable to the trade of CME futures. If you have any further questions regarding block trades, please contact Mr. Eric Wolff, Managing Director, Regulatory Affairs at 312-930-3255; or, Mr. John Labuszewski, Product Development at 312-466-7469. Appendix: Rule 526, Block Transactions 526. BLOCK TRANSACTIONS: Notwithstanding Rule 520. � TRADING CONFINED TO EXCHANGE FACILITIES �, the Board or a Committee appointed by the Board shall, from time to time, determine the minimum thresholds for and the commodities in which Block Transactions (privately negotiated transactions) shall be permitted. The following shall govern Block Transactions: A. A member may execute a Block Transaction for a specified quantity at or in excess of the applicable minimum threshold designated by the Board. B. Each party to a Block Transaction must be an Eligible Participant as that term is defined in Commission Regulation � 36.1. C. A member shall not execute any order by means of a Block Transaction unless that order meets the applicable minimum threshold and includes specific instructions to execute a Block Transaction. D. The price at which a Block Transaction is executed must be "fair and reasonable" in light of (i) the size of such Block Transaction, (ii) the prices and sizes of other transactions in the same contract at the relevant time, (iii) and the prices and sizes of transactions in other relevant markets, including without limitation the underlying cash and futures markets, at the relevant time, and (iv) the circumstances of the parties to such Block Transaction. E. Block Transactions shall not set off conditional orders (e.g., Stop Orders, MIT Orders, etc.) or otherwise affect orders in the regular market. F. All Block Transactions must be reported to a designated Exchange official within five minutes of the time of execution. The report must include the contract, contract month, price, and quantity of the transaction. The Exchange shall immediately publish such information separately from the reports of transactions in the regular market. G. Clearing firms must report Block Transactions to the Exchange Clearing House, including the time of execution, in accordance with the Clearing House Manual of Operations. H. Brokers executing Block Transactions must maintain a record of said transaction, in accordance with Rule 536. � RECORDS FOR ORDERS AND PERSONAL TRANSACTIONS DURING REGULAR TRADING HOURS. I. In the application of paragraphs A., B., and C. of this Rule to a commodity trading advisor ("CTA") registered under the Act, including without limitation any investment advisor registered as such with the Securities and Exchange Commission that is exempt from regulation under the Act or Commission Regulations thereunder, with total assets under management exceeding $25 million, the CTA, and not the CTA�s customers, shall be the applicable entity for purposes of said paragraphs A., B., and C. J. In the application of paragraphs A., B., and C. of this Rule to a foreign Person performing a similar role or function to a CTA or investment advisor as described in paragraph I, and subject as such to foreign regulation, with total assets under management exceeding $50 million, the CTA, and not the CTA�s customers, shall be the applicable entity for purposes of said paragraphs A., B., and C.