Client Management Advisory Notice
From | Client Management
Subject | Reminder: Block Trading Policy Amendments � Effective Sunday, July 1, 2001
Effective Date | 06/27/01
Notice Number | NP#0115
Effective Sunday, July 1, 2001, Block Trading Policies will be amended as follows: Block trading in Eurodollar futures will be extended to include ALL Eurodollar futures contract months � covering the entire ten-year spectrum. Clearing fees for Block Trades on Eurodollar futures and options will be reduced to $1.00 per side from the existing rate of $1.75 per side. The fee for block trades on all other contracts will remain at $1.75 per side. The minimum block trade quantity requirements for Eurodollar contracts will be increased as follows: Futures = 7,500 contracts Options = 10,000 contracts Clearing firms participating in a block transaction will not be identified on the MQPC system consistent with block trading practices elsewhere. Block trading of 13-Week Treasury Bill futures and options will be permitted subject to a minimum quantity requirement of one hundred contracts. Block trading of Weather futures and options (Heating Degree Day and Cooling Degree Day contracts) will be permitted subject to a minimum quantity requirement of twenty contracts. Pending CFTC approval , for Block Trades on Eurodollar futures and options only, the current five minute reporting period will be extended to fifteen minutes. Block trades in all other markets will remain at a five minute reporting requirement. An updated Q&A is attached. Please contact Mr. John Labuszewski, Product Development, at (312) 466-7469, if you have any questions. Thank you. S-3690 June 25, 2001 Block Trading Policies Amended Effective July 1st Chicago Mercantile Exchange Inc. will modify its block trading policies and practices effective on July 1, 2001 (for trades dated Monday, July 2nd). Specifically � Block trading in Eurodollar futures shall be extended to include ALL Eurodollar futures contract months - out the entire ten (10) year spectrum. Current policy limits block trading in Eurodollar futures to the first four (4) quarterly contract months and to serial months. The block fee for Eurodollar futures and options shall be reduced to $1.00 per side from the current level of $1.75 per side. The fee for block trading of all other contracts to be maintained at $1.75 per side. The minimum block trade quantity requirement in Eurodollar FUTURES shall be increased to 7,500 contracts � the minimum block trade quantity requirement for Eurodollar OPTIONS shall be increased to 10,000 contracts. The current futures and options minimum stands at 2,000 contracts. The current five (5) minute reporting period for block transactions in Eurodollar futures and options shall be extended to fifteen (15) minutes. This is intended to provide relief to reporting clearing firms who may experience operational difficulties complying with the brief five-minute requirement. Note that this provision applies to Eurodollar futures and options ONLY � block trades in all other markets remain subject to the five (5) minute reporting requirement. Clearing firms participating in a block transaction will not be identified on the MerQuote system consistent with block trading practices elsewhere. Block trading of 13-Week Treasury Bill futures and options shall be permitted subject to a minimum quantity requirement of one-hundred (100) contracts. Block trading of Weather futures and options (i.e., Heating Degree Day and Cooling Degree Day contracts) shall be permitted subject to a minimum quantity requirement of twenty (20) contracts. The following questions and answers (Q&A) explain the execution, reporting, and submission of block trades. Q1: What is a block transaction? It is a privately negotiated futures or option 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 current language of Rule 526. Q2: How does a block transaction differ from an All-or-None ("AON") transaction - or from an EFP transaction? 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, or options on futures. Q3: What products currently are eligible for block transactions? 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 is permitted, please refer to the table "Minimum Block Transaction Quantities" below. The Exchange had introduced block trading in the futures markets denoted below on November 29, 2000 � block trading in standard option markets commenced on January 16, 2001 � and block trading in flex options commenced on April 30, 2001. Block trading of flex options is restricted to the extent that the futures contract must be listed and the flex option strike price must be at a valid underlying futures price. Q4: What are the minimum transaction quantities? The minimum quantities for block transactions are determined by the Board of Directors and are subject to CFTC review. 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, spreads or combinations. I.e., a unified strategy controlled by a single entity and executed for a single account or group of eligible accounts. For example, a two legged vertical spread in Eurodollar options may be block traded given a minimum order size of 5,000 contracts in each leg of the spread � or 10,000 contracts to comprise the spread. Or, one may block trade a 25-lot spread between nearby and deferred Russell 2000 futures � for a total of 50 contracts on the ticket. Minimum Block Transaction Quantities
| Futures | Options | Flex Options
Eurodollars
| 7,500 contracts | 10,000 contracts | na
T-Bills
| 100 contracts | 100 contracts | na
S&P 500, Nasdaq 100 *
| na | 250 contracts | 250 contracts
FORTUNE e-50
| 50 contracts | na | na
S&P MidCap 400, Russell 2000, S&P/Barra Growth, S&P/Barra Value, Nikkei 225
| 50 contracts | 250 contracts | 250 contracts
Currencies including Euro FX, Japanese Yen, Swiss Franc, British Pound, Canadian Dollar, Mexican Peso, Australian Dollar, Brazilian Real, Deutsche Mark, French Franc, New Zealand Dollar, Russian Ruble, South African Rand *
| na | 250 contracts | na
Weather Contracts (Heating and Cooling Degree Days)
| 20 contracts | 20 contracts | na
* NOT applicable to E-Mini stock indexes or E-Mini currencies. Q5: Who may participate in block transactions? 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? No, the order must specifically be designated as block transaction eligible by the customer. Q7: What are the hours for block trading? Block transactions in futures and standard options may be executed any time. Due to technical reporting limitations, block trades in flex options will be limited to Regular Trading Hours (RTH) of stock index products from 8:30 a.m. to 3:15 p.m. weekdays. Q8: Are there any restrictions upon the transaction price of a block trade? Block trades must be transacted at prices that are "fair and reasonable" in light of the size of the order, prices in related cash, futures and option 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? The record keeping and audit trail requirements associated with a block trade are identical to the requirements associated with any other futures or option 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 five (5) minutes of execution � except in the case of blocked Eurodollar futures and option transactions which must be reported within fifteen (15) minutes of execution. Q10: What information must be included in the Block Trade Report - and to whom said information must be reported? 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. In the case of an option transaction, the Report must further include identification of whether the option is a put or call, and the strike price. In the case of flex options, the Report must further identify the expiration date and the underlying futures contract. If the trade is to be given-up, the Report shall further include identification of the firm numbers of the executing clearing member and the buying and selling clearing members as well as quantities given-up to each clearing firm. 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. Flex options are further restricted to Regular Trading Hours (RTH) of stock index products between 8:30 a.m. and 3:15 p.m. weekdays. Blocked flex option transactions must be reported to Exchange price reporting staff at the equity pulpit on the lower trading floor and not to the GCC. These restrictions are technical in nature. Q11: Block trades must be reported to the Exchange within 5 - or 15 minutes in the case of blocked Eurodollar futures and option transactions - of execution for the purposes of price dissemination - who is responsible for this Block Trade Report? It is generally 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. There is a limited exception to this policy in the case of blocked transactions which are given-up for clearing � such that the executing broker is responsible for the Block Trade Report � as described in Question 17. 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. In the case of options, the net seller of premium is considered the seller of the spread or combination and is responsible for the provision of the Block Trade Report. Block Trade Reports shall be made to the Exchange by Authorized Block Trade Reporters who are so designated by clearing members to the GCC in advance. The clearing firm shall be responsible for block transactions reported to the Exchange by such designates. Q12: Must block trades be "brokered" by an Exchange member or clearing member? 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? 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? Yes. Spreads or combinations may be block traded provided the trade represents a unified strategy controlled by a single entity and executed for a single account or group of eligible accounts. Further, the trade must conform to the minimum order quantity requirements. For purposes of compliance with the minimum order quantity requirements, one may aggregate all legs of the spread or combination. Inter-market spreads and combinations may also be eligible to be block traded provided that all legs of the trade are within contracts for which block trading is permitted. For purposes of complying with the minimum order quantity requirement, one may aggregate all legs of an inter-market spread or combination. The applicable minimum quantity shall be the amount associated with the block eligible contract that has the greatest minimum quantity requirement. For example, if one were to block a combination of Eurodollar futures and options on Eurodollar futures, the applicable minimum requirement shall be the 10,000 contract minimum associated with Eurodollar options � not the 7,500 minimum associated with Eurodollar futures. Q15: May eligible account managers use the post execution allocation procedure for block trades � as specified in Rule 536.E.? 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? There are major differences in the trade entry requirements for blocked futures, blocked standard option and blocked flex option transactions as summarized below � BLOCKED FUTURES trades must be submitted through the Clearing 21 on-line EFP system and 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 12, 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. (Blocked options cannot be entered via the online EFP system like blocked futures trades.) BLOCKED STANDARD OPTION trades � must be entered via the Trade Entry System (TES) or submitted as TREX messages from a firm�s back-office trade entry terminal. Like block futures trades, however, the trade type must be reported as a type "9" and the order type must be reported as a type "B." Block option trades are subject to exchange trade matching. Block options can only match with other block options (order type "B"). BLOCKED FLEX OPTION trades must be entered by trading floor staff using the same entry terminals currently used for (non-blocked) flex options and designated as order type "B." Block trades on flex options are restricted to Regular Trading Hours (RTH) of stock index futures, i.e., 8:30 a.m. to 3:15 p.m. weekdays. Note that block flex option trades must be reported to trading floor staff � not to the GCC � within the normal 5 minute window or 15 minute window in the case of Eurodollar futures and options. For firms that receive outbound TREX confirmation records, block futures, standard option and flex option trades will be identified as Trade Type "1" instead of "9" so that the block is not reported in bookkeeping and customer statements as an EFP. Firms that do not accept TREX confirmation records must ensure that block trades are not reported to customers as EFP trades. Q17: May block trades be given-up? Yes � but with the following distinction between futures, standard options and flex options. Blocked futures and standard option transactions may be given-up through the Clearing Member Transfer Agreement ("CMTA") system where the executing broker delivers the order tickets to representatives of the customer�s clearing firm(s) after execution for reporting and clearing purposes. Note that, similar to other give-up transactions, the executing broker is responsible for the transaction until such time that buying and selling clearing members accept such transactions for the purposes of clearing. Accordingly, it is the responsibility of the executing broker � and not the responsibility of the respective clearing members who ultimately clear the transaction - to provide the Exchange with the Block Trade Report described above in a timely fashion. Note that block trades can not be given-up through the Give-Up System ("GUS") at the present time insofar as GUS does not currently accept trades designated as type "9." As such, the Exchange will not provide billing services per the GAINS system. The Exchange suggests that clearing members provide for such billing per Give-Up Agreements they may maintain with other firms. Finally, note that block flex option trades are not eligible to be given-up. These restrictions are technical in nature. Q18: Can orders be bunched to constitute one side of a block transaction? Yes. Q19: What fees are associated with block transactions? Block transactions shall be assessed a fee as determined by the Board of Directors. The Board has approved a $1.75/side surcharge per contract � except in blocked Eurodollar futures and option transactions where a $1.00/side surcharge per contract is applied - in addition to other fees normally applicable to the trade of CME futures and options. Q20: How can one learn about the details of executed block transactions? The particulars of block transactions are reported on the MerQuote system upon receipt of the Block Trade Report. The MerQuote system carries information including the contract in which the transaction occurred and the executed price. However, clearing firms participating in a block transaction will not be identified on the MerQuote system consistent with block trading practices elsewhere. These reports may be accessed by entering the code "BLK" into the MerQuote system. 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 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 member may execute a Block Transaction for a specified quantity at or in excess of the applicable minimum threshold designated by the Board. Each party to a Block Transaction must be an Eligible Participant as that term is defined in Commission Regulation � 36.1. 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. 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. Block Transactions shall not set off conditional orders (e.g., Stop Orders, MIT Orders, etc.) or otherwise affect orders in the regular market. Block Transactions must be reported to a designated Exchange official within five minutes of the time of execution; except that Block Transactions in Eurodollar futures and options must be reported within fifteen 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. 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. 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. 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. 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.