August 2, 2013
Washington, DC — The Commodity Futures Trading Commission (Commission) has notified the Chicago Mercantile Exchange (CME) and the Chicago Board of Trade (CBOT) (collectively, the Exchanges) of the results of a rule enforcement review completed by the Commission’s Division of Market Oversight (Division). The review covered the target period from November 1, 2010 to October 31, 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 program. The Division’s findings and recommendations were limited to CME and CBOT and their respective products, and did not address the market surveillance program 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 program, the Division recommended that: (1) the Exchanges’ Market Surveillance Group (Market Surveillance) “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 program 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 program.
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 utilize 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.
Copies of the report are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21st Street N.W., Washington, DC 20581, 202-418-5080, or by accessing the Commission’s website at www.cftc.gov.
Last Updated: August 2, 2013