Client Management Advisory Notice
From | Systems Liaison
Subject | New Exchange Traded Funds EFP Transactions � Confirmation Record Testing
Effective Date | 07/07/00
Notice Number | CM#0002
Beginning Friday, July 14, 2000 the CME will accept �Index Shares� or �Exchange Traded Funds� in the context of stock index EFP transactions. (See the attached Special Executive Report S-3554 for the complete list of eligible contracts). These new ETF EFP trades will require that we charge firms a higher EFP clearing fee rate ($5.00 versus the current $1.75) for this special type of transaction. To enter these trades, firms will enter them on-line only via the CME Clearing 21 EFP System. They must include an order type indicator (OTI) of �E�. Firms will not enter these transactions via their back-office trade entry systems New MQM TREX Confirmation Record Type To distinguish these ETF/EFP trades from the current eligible EFPs, special indicators will be added on the MQM TREX confirmation records that firms can receive. They are as follows: An Order Type indicator of �E� in position 151-152 of the main TREX block. A Transaction Type �9� (for EFP) in position 50-51 of the main TREX block. A Trade source code of EFP (146-148) in the main TREX block. An EFP indicator in the Subsystem field (6-8) of the M2 Confirmation/Status message block. The CME will start forwarding the new ETF/EFP confirmation records on Friday, July 14th. These records will be sent (along with the other MQM confirmation records), to those firms that currently receive confirmation records. We recognize that your firm may not be able to accommodate an automated way of charging this new rate, by this July 14th. In the interim, if your firm�s customers execute these types of transactions, you may need to manually adjust the fees for your books. ETF/EFP MQM Test Confirmation File If your firm would like a test file containing these new MQM confirmation records with order type �E�� and transaction type �9� EFP trades, please indicate your interest in the space provided below and return the form by 5:00 p.m., Monday, July 10th. We will put the sample records out in the requesting firm�s test queues (XX05 channels) on Tuesday, July 11th by 1:00 p.m. Whenever you bring up your test system, the records should be waiting in the queue. After you have retrieved the test messages, DON�T FORGET TO SWITCH BACK TO PRODUCTION! Also, let us know if your test is successful. If you have any questions, please contact Karen F. McCoy at (312) 930-4524, kmccoy@cme.com or Farris Oweimrin at (312) 648-4780, foweimri@cme.com Thank you Request for MQM Test ETF/EFP Records Firm Name Firm Number: MQM Channel (i.e. AB05): Firm Contact Phone Nbr#: Email Address: Fax or E-Mail to: (312) 930-8158 or kmccoy@cme.com or foweimri@cme.com S-3554 Friday, July 7, 2000 Index Shares or Exchange Traded Funds Approved for Use in Context of Stock Index EFPs Effective Friday, July 14th The Exchange accepts �Index Shares� or �Exchange Traded Funds� (ETFs) in the context of stock index EFP transactions effective Friday, July 14th. This Special Executive Report, cast in a Question & Answer (Q&A) format is intended to address specific issues associated with the execution and reporting of these transactions. Q. What is an �EFP?� A. The term �EFP� is an acronym for �Exchange-For-Physicals.� Such a transaction is also sometimes referred to as a �transfer of spot for futures� and is governed by Exchange Rule 538. An EFP represents an ex-pit transaction consummated by two parties wherein one of the parties is the simultaneous buyer of the �spot� commodity and seller of the futures contract � while the other party is the simultaneous seller of the �spot� commodity and the buyer of the futures contract. The spot seller is required to have in his possession the item to be delivered. Q. What is an �ETF?� A. An Exchange Traded Fund (ETF) � also known as Index Shares - is a generic term for a novel type of investment vehicle. The first and most popular product of this type was developed by Amex in the form of SPDRs (Standard & Poor�s Depository Receipts with a ticker symbol of �SPY�). A SPDR evidences ownership in the SPDR Trust, a unit investment trust that holds a portfolio of common stocks designed to track the S&P 500. Other Index Share products for other stock indexes traded on the Exchange in the form of futures are also available. These securities trade on securities exchanges like any other stock. Unlike mutual funds that may restrict entry and exit to the close, Index Shares may be traded throughout the session and often trade tick-for-tick vs. futures. Q. Does the use of ETFs in the context of EFPs represent a change in Exchange policy? A. Yes. In the past, the Exchange recognized the use of a portfolio of stocks substantially similar in composition to the Stock Index which is the subject of the futures contract as a valid �spot commodity� in the context of an EFP. The use of Exchange Traded Funds or ETFs represents a liberalized policy. Q. Why is the Exchange adopting this policy? A. This EFP facility has been adopted in response to expressed customer demand. In particular, large institutional players including the market makers in index shares have expressed interest in this facility. Note that EFPs are currently permitted in the context of stock index futures vs. actual stocks - and that such transactions typically entail unit sizes of $10 million in stocks or better. The Board intends to review the efficaciousness of the program early next year. Q. Which Stock Index futures are affected by this policy? A. Currently, ETFs are available representing the S&P 500, the Nasdaq 100, the Midcap 400, the Russell 2000, the S&P/BARRA Growth Index and the S&P/BARRA Value Index. The following list enumerates the ETF products currently recognized by the Exchange as valid in the context of EFPs. It is the Exchange�s policy to permit the use of other ETFs that mirror specific stock indexes traded on the Exchange in the form of futures as they become available.
###### Stock Index Futures | ###### Exchange Traded Fund | ###### Ticker
S&P 500 Index | Standard & Poor�s Depository Receipt (SPDR) Trust | SPY
S&P 500 Index | iShares S&P 500 Index Fund | IVV
Nasdaq 100 Index | Nasdaq 100 Trust | QQQ
S&P MidCap 400 Index | MidCap SPDR Trust | MDY
S&P MidCap 400 Index | iShares S&P MidCap 400 Index Fund | IJH
Russell 2000 Index | iShares Russell 2000 Index Fund | IWM
S&P/BARRA Growth Index | iShares S&P 500/BARRA Growth Index Fund | IVW
S&P/BARRAValue Index | iShares S&P 500/BARRA Value Index Fund | IVE
Q. Are there any restrictions on these EFP transactions? A. Yes. The minimum lot size for such trade is fifty (50) contracts. I.e., 50 �standard� S&P 500 futures, fifty (50) �standard� Nasdaq futures, fifty (50) MidCap futures, or fifty (50) of any other stock index futures for which Index Shares may be offered. Note that one �creation unit� of 50,000 SPDRs represents 20 standard sized S&P 500 futures; one �creation unit� of 50,000 QQQs corresponds to 12.5 futures; and, one �creation unit� of 25,000 MidCap SPDRs corresponds to 20 futures. EFPs using ETFs are NOT permitted in the context of the E-Mini S&P 500 or E-Mini Nasdaq 100 contracts. Consistent with standing Exchange policy � transitory EFPs using ETFs are NOT permitted. Q. What fees are associated with the transaction of an EFP using an ETF? A. Said transactions to be subject to a $5.00/side EFP surcharge. This $5.00/side surcharge is required in addition to other applicable exchange and clearing fees. Note that stock index EFPs transacted against a portfolio of substantially similar stock are charged the standard $1.75/side surcharge in addition to other applicable fees. This $5.00 surcharge is required in lieu of and not in addition to that $1.75 surcharge. Q. What are the trade processing requirements for EFPs using an ETF? A. EFPs using ETFs will be reported to the Exchange for clearing purposes by utilizing the Exchange�s Clearing 21 EFP Trade Entry System. Like all EFPs, these EFPs must be submitted within one hour of execution. Due to the divergent surcharge, EFPs on ETFs (at $5/side) will require the additional entry of an Order Type of �E� to distinguish them from EFPs on Actual Stocks (at $1.75/side). An EFP with Order Type �E� will be valid only for stock index futures with associated ETF products currently recognized by the Exchange as valid in the context of EFPs. Q. How does one access the Exchange�s online Clearing 21 EFP Trade Entry System? A. The Clearing 21 EFP Trade Entry System is an online system enabling a firm to enter, correct or accept the futures side of an EFP transaction. This system was established to simplify the process of matching ex-pit transactions by utilizing one-sided trade entry. The system is readily accessible via 3270 Emulation - while utilizing the benefits of advanced C21 database technology. 3270 Emulation is available on your firm�s back office or trading floor/booth PC and/or on a C21 workstation. All users with current access to TES are automatically granted access to the C21 EFP system. Additional information may be found in the Clearing 21 EFP Trade Entry System User Manual made available by the Systems Liaison Group. Please direct any inquiries regarding this matter to John W. Labuszewski at 312-466-7469; or, Rick Redding at 312-930-3373.