The Commodity Futures Trading Commission has notified the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) of the results of a rule enforcement review completed by the Commission’s division of market oversight.
The review covered the target period from 1 November 2010 to 31 October 2011. The division assessed the exchanges’ compliance with Core Principles 4 and 5, pre- and post-Dodd–Frank Act, relating to the exchanges’ market surveillance programme. The division’s findings and recommendations were limited to CME and CBOT and their respective products, and did not address the market surveillance programme at any other CME Group exchange.
The division had no recommendations with respect to the exchanges’ market surveillance systems, routine surveillance of market fundamentals, or surveillance of expiring contracts. However, the division found that the exchanges’ procedures for monitoring exchange for related position (EFRP) transactions are inadequate and require significant and prompt improvement.
With respect to their EFRP programme, the division recommended that: (1) the exchanges’ market surveillance group “ensure that the factors and procedures it uses to identify EFRPs that warrant the opening of case files are adequately targeting problematic EFRPs” and (2) “market surveillance establish an adequate and robust programme to ensure that parties and clearing firms to EFRP transactions maintain relevant documents pursuant to the exchanges’ rules and, accordingly, verify the bona fides of a sufficiently large, strategically selected sample of EFRPs.” The division further provided specific guidance relating to the establishment of an adequate programme.
The division also identified certain other areas in which the exchanges need to make improvements. The division recommended that: (1) the exchanges not grant retroactive hedge exemptions if a participant does not file a timely application and, further, consider untimely hedge exemption applications to be speculative limit violations; (2) market surveillance utilise its discretion to refer matters to the exchanges’ enforcement group when participants commit egregious conduct, such as continuing to increase positions after notification of a speculative limit violation; (3) market surveillance ensure that, prior to granting a hedge exemption, the applicant has submitted a complete and accurate application and has designated the appropriate hedging category(ies); (4) market surveillance monitor its hedge exemption program to ensure that its procedures prevent exemptions from being granted at levels above those requested by applicants; (5) market surveillance ensure that its investigatory memoranda contain appropriate signatures and are accurately dated; and (6) market surveillance ensure that its investigations are closed within 12 months of the date they are opened, absent extenuating circumstances, and all investigatory files contain orderly documentation, including up-to-date activity logs.
Lastly, while the division found that the exchanges maintained an adequate and highly skilled market surveillance staff as of the end of the target period, the division recommended that the exchanges assess whether their current staffing levels are sufficient to implement the division’s recommendations.
