In July 2007, the Chicago Mercantile Exchange (“CME”) and the Chicago Board of Trade (“CBOT”) holding companies engaged in an historic merger. The combined entity, Chicago Mercantile Group, recently announced as part of its integration effort proposed revisions to the CME and the CBOT rule books. The exchange rule books effect market end-users because they determine the operating procedures and the trading rules for the exchanges.
The first group of rule revisions will become effective on November 29, 2007, resulting in a harmonized rule book structure common to both exchanges. Further revisions of the rules will be implemented in January 2008 as part of the migration of CBOT products to the Globex® trading platform.
Why Will CME and CBOT Continue to Use Separate Rule Books?
Although the CME and CBOT holding companies have merged, the two exchanges will remain separate, each maintaining its separate memberships and self-regulatory obligations. Accordingly, each exchange maintains a separate rule book that applies only to the products traded on that exchange. However, there will be a single market regulation department for both exchanges. Although the two exchanges have made an effort to harmonize rules and trading practices, there will remain a number of areas of significant difference between the two.
What Are the Major Changes to CBOT Rules?
The most visible change will be the reformatting of the CBOT rule book to mirror that of the CME. In addition to the new format of the CBOT rule book, the most significant changes to CBOT trading rules and practices are:
- Trading system. The rules relating to the electronic trading system of the CBOT will be amended to reflect migration of most CBOT products to Globex®. These amendments are expected to be implemented in January.
- Cabinet trades. The current CBOT practice of restricting option cabinet trades to liquidating trades only is being modified to permit cabinet trades to both initiate and off-set positions.
- FLEX Options. CBOT FLEX Options will now be permitted in any listed futures month rather than just those that have opened for trading.
What Are the Major Changes to the CME Rules?
The following changes will be made to trading rules and practices at the CME:
- A All or none bids or offers. The CME is adopting CBOT’s procedure for pit trading whereby all or none bids or offers may be accepted by more than one member so long as the entire quantity is executed at a single price.
- D Discretionary accounts. CME members will no longer be able to personally execute pit transactions for discretionary customer accounts.
- Error trades. The CME will adopt the CBOT rule that permits a member to assign the unfilled or under-filled customer orders to the member’s error account at the price to which the customer was entitled if that amount has first been executed in the market at a price less favorable to that which the customer was entitled. This will eliminate the need for brokers to issue adjustment checks for these types of errors.
- Maintenance of off-setting positions. The CME will modify its current practice of prohibiting long and short positions for the same account or for accounts under common ownership from being held open simultaneously. CME will now permit long and short positions of the same owner to be held open at the request of the customer.
What Rule Changes A Are Common to Both Exchanges?
The following rule changes are common to both exchanges:
- S Speculative position limits. The speculative position limit, position accountability and reporting level rules have been harmonized and will appear in one location in table form in each of the rule books.
- Off-set of simultaneous open long and short positions. As explained above, the CME will now permit simultaneous long and short positions in the same account to be held open at the customer’s request. Both exchanges have harmonized their practice and will permit such positions to be off-set through transfer or netting in non-delivery months. During the delivery period, off-set of such positions through transfer or netting will be permitted, but in an amount that may not exceed 1 percent of the open interest in the effected contract month or in the put or call options strike. On or after first notice day for deliveries, such off-sets must, in addition, be for the purpose of addressing a bona fide error.
What A Are the Continuing Differences Between the Rules of the Two Exchanges?
Trade practices will continue to differ between the two exchanges with respect to the following:
- P Pre-execution discussions. The CME will continue to permit pre-execution discussions with respect to transactions on Globex® under current conditions; the CBOT will continue to prohibit such discussions.
- Block trading. Although the wording of the rules of both exchanges will be similar, the CBOT products on which block trades are permitted will continue to be limited in comparison to the wider availability of block trading with respect to CME products.
- Freshening delivery dates. The CBOT will continue to permit a party to liquidate and reestablish a position in order to modify its placement in the delivery queue. The CME will continue to prohibit position freshening.
- D Delivery procedures. Delivery procedures will continue to be highly product specific and will vary on a product-by-product basis.
- Fees. Each exchange will maintain its existing fee policies.
How Will the Proposed Changes A Affect Exchange End-Users?
Many of the changes to the rule books, such as floor solicitation rights, committee structure and governance, and exchange disciplinary procedures, will most directly affect members of the two exchanges. However, exchange end-users should be aware of changes in the trading rules of each exchange and should keep in mind those trading rules and practices that continue to differ between the two exchanges. Thus, despite the merger of the CME and the CBOT holding companies, exchange end-users will continue to have to consult the rule book applicable to the particular contract in which they are trading in order to remain in compliance with each exchange’s requirements.