09/03/2002
Rule 4.71 addresses how to resolve errors, out-trades and "who trades." The new provisions of the rule allow a broker, who has under-bought or under-sold an order, to cross the under-filled portion of the order with their error account, provided that the member cannot obtain a price which is equal to that which the order should have received in the market, or if the Floor Member discovers the error after the close of such market.
When the criteria above has been satisfied for errors, the member may elect to take the opposite side of the execution for the customer order and allocate it to a designated error account. This provision is similar to the provisions for correction of out- or "who" trades contained in Rule 4.71. Note that the cross-trade is not done at open outcry and is not recorded on the member's trading card. Instead, a multi-ply Out-Trade/Who Trade correction Slip must be prepared in accordance with Rule 4.71(e). Note that:
- The slip must be prepared within 15 minutes of the discovery and resolution of the under fill;
- The slip must accurately reflect all required information pertaining to the original order and the correcting cross-trade, the error account and any correcting trade transacted to offset the position allocated to the member's error account.
- Rule 4.71(d) provides that a broker who elects to correct an error, out-trade or "who" trade in accordance with this new cross-trade procedure may not establish a position which would offset the position acquired for the error account until at least ten minutes after the execution of the original trade for the customer.
- All supporting trade documentation must be attached to the Slip, including copies of the applicable trading card(s) and order ticket(s).
- All trades executed pursuant to this rule will be audited by Compliance Department Staff to verify that they conform with the rule.
Information Seminars on Rule 4.71
Over the course of the next two weeks, informational seminars on Rule 4.71 will be conducted by Members and Staff. The first seminar will be held after the close on Wednesday, September 4, 2002, in the Gold Ring. There will be an additional seminar after the close on Tuesday, September 10, 2002. All members are encouraged to attend.
Amendments to Comex Division Rule 4.71
Strike-through indicate deletions, brackets indicate additions.
Rule 4.71 Resolution of Errors, Out- and "Who" Trades
(a) Errors. If a floor member has failed to execute an order placed by a customer or has made an error in handling a customer order, such as by under buying or under selling,
(1) Execute the order in the market and adjust the customer if the price is worse than that which the customer should have received had the error not occurred;
(2) Execute a spread transaction in accordance with Rule 4.71A-Spread Transaction to Rectify an Error; or
(3) Take the opposite side of the order (notwithstanding any rule to the contrary), at a price which is equal to the price the order should have received had the error not occurred. If such price cannot be obtained in the market, or the floor member discovers the error after the close of such market, the floor member may assign the opposite side of the order to the floor member's designated error account at a price which is equal to the price which the order should have received had the error not occurred, notwithstanding any rule to the contrary. Any assignment made after the close of the market must be made promptly.
In no case may a customer receive a price which is worse than that which the customer should have received had the error not occurred. Any transaction or straddle transaction executed pursuant to Subsection (3) above shall be within such day's trading range, reported to the Compliance Department in accordance with the procedures listed in Section (e) below.]
(b) Out-Trades.
(1) If two floor members who have executed a trade disagree about any of the material terms of the trade, including the quantity, price, option series or contract month, or if one floor member fails to acknowledge the trade (collectively referred to as "out-trades"), the floor members shall either nullify ("break") the trade or agree to accept the trade in accordance with the terms recorded by one of the two floor members on his trading card
(2) If a trade is "broken" [in accordance with Subsection (b)(1)] after it has been confirmed to a customer, the floor member handling the customer order may take the opposite side of the order into an account designated as his error account so that the order can be filled by the terms confirmed, provided that he does so in accordance with the procedures set forth in Section (e) of this rule by the close of trading on the business day following the day on which the trade originally was executed.
(c) "Who" Trades. If a floor member has executed a trade for a customer, recorded the terms of the trade on his trading card, and confirmed the trade to the customer, but is unable to determine the proper identity of the opposite floor member (a "Who" trade), the floor member shall either[:]
[(1)] re-execute the trade in the ring, by open outcry, [and adjust the customer to the originally confirmed price;] or
[(2)] substitute himself for the unknown opposite floor member, take the opposite side of the trade into his designated error [account and assign a fill to the customer at the originally confirmed terms,] provided that he does so in accordance with the procedures set forth in Section (e) of this rule by the close of trading on the business day following the day on which the trade originally was executed.
(d) Offset. A floor member may not establish a position that would offset the position he has acquired pursuant to [Sub]section
(e) Procedures. A floor member may take the opposite side of a customer order to resolve an [error,] out- or "Who" trade [(as defined in Sections (a)(3), (b) and (c) above)] only in accordance with the following procedures:
(1) Within 15 minutes of the resolution of an error, out- or "Who" trade, the floor member must prepare or cause to be prepared an Error/Out-Trade Correction Slip [(hereafter "Slip") that]
(A) the date of the [error,] out- or "Who" trade;
(B) the floor member's badge number;
(C) the floor member's error account number and the clearing firm at which the account is maintained;
(D) the badge of the opposite floor member,
(E) the details of (i) the trade as recorded by the floor member, (ii) the trade as recorded by the opposite floor member, in the case of an out-trade, [and] (iii) the cross trade by which the floor member has taken the opposite side of his customer's order;
(F) the date on which the Slip
(G) the signature of the individual who
(H) such other information as the Exchange may require.
(2) Upon completion of the
(3) After the Exchange representative has signed the
(A)
(B)
(C)
(4) The floor member shall retain a copy of the
(f) Recordation Requirements.
(1) A floor member shall not be required to insert on a trading card the cross trade resulting from the resolution of an error, out-or "Who" trade by having taken the opposite side of a customer's order, but any trade offsetting the cross trade must be recorded in conformity with the requirements of Rule 4.80 ("Trading Cards") and, if executed after the cross trade, specially identified in such manner as the Exchange may prescribe.
(2) Trade data submitted to the Exchange
(3) Any claim made by a floor member against another floor member in connection with an out-trade shall be recorded on the reverse side of the trading card of each of the floor members.
(g) Adjustments. If the resolution of an out-trade or a dispute involving an error requires a floor member to make an adjustment to another floor member, or to a customer, the adjustment shall be made by check.
(h) Modification of Trade Terms Prohibited. Except as otherwise provided in this rule, a floor member shall not change the terms of a trade to correct an error or to resolve an out-trade.
(i) Arbitration. Nothing shall preclude the resolution of a dispute arising from or in connection with an error or out-trade by means of arbitration in accordance with Chapter [Five] 9 of these rules.