CME and CBOT Adopt Modifications to Pit Space Dispute Guidelines

Effective immediately, CME and CBOT have adopted modifications to the Pit Space Dispute Guidelines (“Guidelines”) which decrease the size of the Panel of the Floor Conduct Committee (“Panel”) that hears pit space allocation disputes from four members to three members.  The Panel will continue to include one member who will serve as a chairman, who may vote only to break a tie.  Other than now referring to the Floor Conduct Committee instead of the Pit Supervision Committee (a name change adopted during the 2007 harmonization of the CME and CBOT Rulebooks) and correcting rule titles, no other substantive changes have been made to the Guidelines.  A copy of the modified Guidelines is set forth below.

If you have any questions, please contact Barry Schauer, Trading Floor Investigations Specialist, Market Regulation Department, at 312.341.7640 or Felipe (Jesse) Martinez, Manager, Trading Floor Operations, at 312.341.3123.

For media inquiries concerning this Special Executive Report, please contact CME Group Corporate Communications at 312.930.3434 or news@cmegroup.com.

CME and CBOT Pit Space Dispute Guidelines

1.         Floor Conduct Committee (“FCC”) Involvement:  The FCC will only become involved in pit space disputes if:

a)         There is an abandonment of a space, a reviewable space situation exists or a dispute arises over who may occupy a previously unoccupied space;

b)        The contesting parties are unable to agree to a resolution; and

c)         The applicable pit committee is unable to assist the parties in resolving their dispute.

The vast majority of pit space disputes should be resolved by the involved parties with the help of their particular pit committee.

2.         Abandonment:

a)         A member’s spot will be considered abandoned if the member is absent for more than thirty (30) trading days without having expressed an intention to return to that spot.  A member who believes that he or she may be absent from a spot for more than thirty (30) trading days, but who plans to return to the spot, must provide verbal or written notice with an explanation to a pit committee or FCC member in that pit or an exchange official, expressing an intention to return to the spot.  The length of time that a member may be absent from a spot after providing written notice of an intention to return to the spot will be reviewed on a case-by-case basis.

b)        A significant Exchange disciplinary finding against an individual, such as a suspension for 60 days or more, will result in an abandonment of one’s spot.

3.         Reviewable Space Situations:

a)         A member’s spot may be eligible for review if a member alters his or her trading status either by affiliating with, or ending an affiliation with, a broker association, trading group or other entity.

b)        A member’s spot may be eligible for review if a change in the ownership/principal(s) of a broker association, trading group or other entity occurs.

4.         Criteria for Resolving Disputes:  First and foremost, the fundamental question to be answered in any dispute is “what is in the best interest of the market?”

Secondly, in the event that the FCC is not able to clearly determine “what is in the best interest of the market,” the FCC may take into consideration the following guidelines in resolving a dispute, three of which shall be accorded greater weight:  equity ownership; volume of business; tenure; legacy of space; association/affiliation; sightlines; technology; need for accommodation; proximity of competing parties; and extenuating circumstances.  The three guidelines receiving greater weight are equity ownership, volume of business and tenure.

5.         Explanation of Guidelines:

·         Equity ownership CME – a member on a 106.C (“Family Transfers”), 106.F. (“Clearing Member”), 106.G. (“Transfer to Wholly-Owned Entities”), 106.H. (“Trading Member Firm”), 106.I. (“Affiliate Member Firm”) and 106.J (“Equity Member firm”) seat.

·         Equity Ownership CBOT – a member on a 106.C (“Family Transfers”), 106.F. (“Clearing Members”), 106.G. (“Transfer to Wholly Owned Entities”), 106.H. (“Trading Member Firm”), 106.I. (“Affiliate Member Firm”) and 106.J. (“Equity Member Firm”)

·         In disputes involving house brokers or members of a proprietary trading group or broker association, the FCC will not give consideration to the total number of seats owned by the employing clearing member, proprietary trading group or broker association.  Additionally, in a dispute between two lessees where one of the lessees owns another membership, that lessee will be given greater weight in evaluating this particular criterion.

·         Volume of business – should be considered qualitatively rather than quantitatively.  If “A” does X amount of volume and “B” does X+, it is not necessarily so that “B” will be awarded the disputed space.

·         Tenure – length of time in the particular market (pit) in question.

·         Legacy of space (intra-group disputes) – how and by who was the spot initially occupied.

·         Association/affiliation/clearing member – groups may show the negative ramifications if the association, trading group or clearing member is not permitted use of a space.

·         Sightlines – the importance to each party or, in the case of markets where orders are physically delivered the importance of access to each party.

·         Technology – to what extent can any of the parties’ business needs be satisfied by considering technological alternatives?

·         Need for accommodation – the extent to which the parties’ existing business is already satisfied by their existing space or whether the new space is needed in order to facilitate either existing or anticipated new business.  The FCC will give consideration to the intentions of the clearing member firms respecting allocation of their order flow to any of the contestants for the spot.

·         Proximity of competing parties – which party stands within a given pit community (for example, in a large pit such as Eurodollar futures, several communities exist:  front month; second month; third and fourth months and back months.)

·         Extenuating circumstances – unique factors of a particular case.

The ultimate goal of any pit space dispute is an equitable solution that upholds the best interests of the market and, therefore, the best interests of the Exchange.

6.         Clerk Space:  A member who modifies his or her status pursuant to these guidelines shall be afforded appropriate clerk space to facilitate his or her business.  Appropriate clerk space shall be determined on a case-by-case basis.

7.         Proceedings:  In the event a pit space dispute can neither be resolved by the individual parties nor by the applicable pit committee, a member may request a hearing before the FCC.  A hearing shall be granted as soon as practicable.

Proceedings before the FCC will be similar to a summary proceeding.  A panel of three FCC members, which shall include a chairman, will hear the dispute.  A chairman may only vote to break a tie.  The proceeding will not be tape-recorded.  The parties will be allowed to bring witnesses or any other documentary evidence to support their claim.  No attorneys will be allowed in the proceeding or in any subsequent appellate proceedings.  The party receiving a majority vote by the panel will prevail.

Decisions rendered by the FCC shall be subject to a limited right of appeal.  In the event a member requests that a decision be reviewed, any formal appeal must satisfy one of the three appellate criteria in Rule 409.D.  Those criteria require that the decision rendered by the Panel was: arbitrary, capricious, or an abuse of the committee’s discretion; in excess of the committee’s authority or jurisdiction; or based on a clearly erroneous application or interpretation of Exchange Rules.  If the appeal meets one of the three criteria, the appeal shall be heard by a Panel of the Business Conduct Committee, whose decision shall be final.