Division of Trading and Markets
The Division of Trading and Markets (T&M or Division) develops, implements, and interprets regulations that protect customers, prevent trading and sales practice abuses, and assure the financial integrity of the futures markets and firms holding customer funds. In addition, T&M oversees the compliance activities of the futures industry self-regulatory organizations (SROs), which include the U.S. commodity exchanges, their clearinghouses, and the National Futures Association (NFA). The Division also conducts trade practice surveillance, performs financial and sales practice compliance audits of registrants, reviews exchange and futures association rule amendments and submissions, and oversees the registration of industry professionals.
Rulemakings, Orders and Advisories
The Commission has engaged in a comprehensive regulatory reform effort that is designed to streamline and refine the regulations promulgated under the Commodity Exchange Act (CEA). The Commission's goal is to develop an effective, flexible regulatory environment that responds to evolving market conditions. As part of this effort, during FY 1999 T&M recommended and the Commission published the following rule proposals, final rules, orders, and advisories.
Access to Automated Boards of Trade
The Commission proposed rules governing the circumstances under which foreign futures exchanges could be accessed from electronic trading devices in the United States. Subsequently, the Commission issued an order that withdrew the proposed rules and instructed the Commission staff to process requests from foreign exchanges for no-action relief that would allow them to place trading systems in the United States. In accordance with that instruction, the Division reviewed requests for no-action relief and issued no-action letters to LIFFE Administration and Management, Eurex Deutschland, ParisbourseSBF, and collectively to Sydney Futures Exchange Limited and the New Zealand Futures and Options Exchange Limited.
Procedures for the Filing of Requests for the Issuance of Exemptive, No-Action and Interpretative Letters
The Commission adopted Rule 140.99, which establishes procedures for submitting requests for exemptive, no-action and interpretative letters. The procedures set forth in Rule 140.99 provide notice and guidance to the public for submitting these requests to Commission staff. The rule is designed to help requestors present clearly the guidance sought, the issues raised, and the relevant legal authorities.
Expanded Use of Micrographic and Electronic Storage Media
The Commission adopted amendments to Rule 1.31 to allow most categories of required records to be stored in either micrographic or electronic media for the full five-year maintenance period. The amendments are designed to maximize the cost reduction and time saving benefits of electronic storage while retaining safeguards to ensure reliability in the recordkeeping process. Original trading cards and customer order tickets must still be maintained for the full five-year period. However, unless directed otherwise, a recordkeeper may respond initially to a request from the Commission for written trading cards and order tickets by providing reproductions of records maintained on electronic storage media.
The Commission proposed rules to permit futures commission merchants (FCMs), introducing brokers (IBs), commodity pool operators (CPOs) and commodity trading advisors (CTAs) to accept electronic signatures in lieu of handwritten signatures where the rules currently require document to be signed by a customer, client, or pool participant.
Representations and Disclosures Required by Foreign Persons
The Commission approved final rule amendments that revise the procedure by which foreign persons acting in the capacity of an IB, CPO, or CTA may obtain an exemption from registration under Rule 30.5. The amendments require foreign and domestic CPOs and CTAs to provide U.S. retail customers with certain disclosures, regardless of whether they are trading on U.S. or foreign markets.
Direct Foreign Order Transmittal
The Commission published a proposed rule to permit certain foreign firms acting as FCMs and IBs to accept and execute foreign futures and options orders from certain sophisticated U.S. customers via telephone, facsimile, and electronic message without registering with the Commission. The proposed rule would provide qualified U.S. customers with more direct access to international markets without requiring those customers to sacrifice the operational and economic efficiencies offered by a single U.S. global clearing firm.
Foreign Futures and Options Transactions Registration Requirements
The Commission published proposed rule amendments to its Part 30 regulations, which govern the offer and sale of foreign futures and options to U.S. customers. The proposed rule amendments would clarify the circumstances in which members of a foreign board of trade must register with the Commission or obtain an exemption from registration.
London Clearinghouse Limited's Petition for Exemption
The Commission issued an order in response to the London Clearing House Limited's (LCH's) Petition for Exemption Pursuant to Section 4(c) of the CEA. The order exempts certain swap agreements submitted for clearing through LCH's newly developed swaps clearing operation, referred to as SwapClear, from most provisions of the CEA and Commission regulations. The order provides a similar exemption to specified persons who engage in certain activities with respect to such swap agreements.
The Commission published proposed amendments to Part 4 of its rules concerning the documentation, computation, and disclosure of CTA past performance information. The proposed rules would simplify the recordkeeping and computational requirements for CTAs who accept partially funded client accounts. The rules would also provide meaningful and focused disclosure to clients regarding the past performance of the CTA and the risks associated with trading on a partially funded basis.
Potential Conflicts of Interest at Self-Regulatory Organizations
The Commission approved new Regulation 1.69, which establishes standards regarding potential conflicts of interest at SROs. The new regulation requires SROs to adopt rules prohibiting governing board, disciplinary committee, and oversight panel members from deliberating or voting on certain matters if the member has either a relationship with the matter's named party in interest or a financial interest in the matter's outcome.
Alternative Execution, or Block Trading, Procedures
The Commission notified the futures industry that it will consider contract market proposals to adopt alternative execution procedures for large size or other types of orders on a case-by-case basis, applying a flexible approach to the requirements of the CEA and the Commission's regulations. The advisory issued by the Commission allows each contract market to permit alternative execution procedures and to develop procedures that reflect the particular characteristics and needs of its individual markets and market participants.
CBOT, CME, AND NYMEX Petition for Exemption
The Division prepared and the Commission published in the Federal Register a request for comment on a petition for exemption pursuant to Section 4(c) of the CEA submitted by the Chicago Board of Trade (CBOT), the Chicago Mercantile Exchange (CME), and the New York Mercantile Exchange (NYMEX). The petition requests an exemption for all boards of trade designated by the Commission as contract markets from the CEA's requirements in three areas: the contract market designation process for new contract submissions; the contract market rule review process; and provisions of the CEA that would otherwise prevent the immediate adoption and implementation of trading rules and procedures comparable to those of a competing foreign exchange.
Year 2000 Efforts
The Division developed a multi-faceted program to foster the Year 2000 readiness of the SROs and Commission registrants. In four advisories published from January 1997 through June of 1999, the Division:
· defined the steps to a sound Year 2000 preparedness plan (evaluation of hardware and software readiness, remediation, testing and contingency planning);
· clarified the Commission registrants' duty to be Year 2000 compliant;
· required auditors of FCMs to file with the Commission a special Year 2000 report as part of their annual report of financial conditions;
· required registrants to have written contingency plans in place by September 30, 1999; and
· provided guidance on developing such a plan.
During FY 1999, the staff monitored the submission of appropriately 200 independent accountants' reports on applying agreed-upon procedures demonstrating responsiveness with CFTC Advisories Nos. 17-98 and 42-98 concerning potential systems problems resulting from Year 2000 issues. In addition, the Commission requested that the Joint Audit Committee (JAC), which is composed of representatives from the SROs, include a Year 2000 component in the audit requirement for exchange member firms. The JAC provides quarterly reports to the Commission on member inspections.
The Division monitored the SROs' Year 2000 efforts by requesting detailed information concerning their internal preparations and their oversight programs. The staff also conducted on-site visits with SRO Year 2000 teams and maintained frequent contact with SRO Year 2000 personnel. In addition, the Division forged a relationship with the Futures Industry Association to help achieve industry-wide testing, contingency plans, and Year 2000 preparation. The current focus of the Year 2000 efforts of the Division and the futures industry is on event management planning over the transition weekend and first week of the new year.
The director and a deputy director of T&M have represented the Commission on the President's Council on Year 2000 Conversion (Council). The Council is responsible for addressing the Year 2000 problem through a coordinated governmental approach. Toward this end, the Council has served as a clearinghouse for information concerning the Year 2000 activities of its member agencies. The Division has been an active contributor to the work of the Council and has also served on two subgroups, the Financial Institutions Sector Group and the Food Supply Sector Group. The Division also consulted with the Securities and Exchange Commission and the Securities Industry Association concerning the interplay between Year 2000 activities in the securities and futures markets. Lastly, the Commission has been engaged in international Year 2000 initiatives through its participation in the International Organisation of Securities Commissions (IOSCO) and the Joint Year 2000 Council.
Exemptive Relief and Guidance
In FY 1999, T&M staff responded to a high volume of requests for guidance concerning the applicability of regulations to specific transactions, products, persons, and market circumstances. Division staff issued over 250 exemptive letters, no-action positions, and interpretative guidance in response to written requests from members of the public and the regulated industry. Staff also issued more that 125 responses to requests for guidance received through the Commission's website and responded to more than 2,000 telephone inquiries concerning the application of Commission requirements.
Review and Approval of Exchange Rules
The Division promotes and enhances self-regulation by reviewing proposed exchange rules, rule amendments, and other proposals for consistency with the CEA and Commission regulations. These submissions often present complex new trading procedures, market structures, and financial arrangements that raise novel issues. During FY 1999, the Division reviewed and the Commission approved 307 new exchange rules or rule amendments. The Division also reviewed and permitted 394 new exchange rules or rule amendments to go into effect without prior Commission approval. Significant exchange proposals approved by the Commission or permitted to go into effect by the Division in this period include the following.
NYCC and GSCC Proprietary Cross-Margining Proposal
The Commission approved a proposal from the New York Clearing Corporation (NYCC) to establish a program with the Government Securities Clearing Corporation (GSCC) for the proprietary cross-margining of Treasury futures contracts traded at the Cantor Financial Futures Exchange (CFFE) with cash Treasury securities cleared through GSCC. The GSCC-NYCC program differs from previous cross-margining programs because each clearing organization maintains a separate account of the proprietary positions and funds subject to the cross-margining program. Under previous cross-margining arrangements, each participating clearing organization possessed a perfected security interest and lien in the joint account that holds the cross-margined positions and supporting funds.
CFFE London Trading Facility
The Commission approved rules that permit CFFE to operate trading facilities in foreign jurisdictions, including London. At these facilities, terminal operators can accept orders for input on the Cantor System from foreign members of the CFFE called "Foreign Screen Based Traders." These rules also expands the CFFE's trading day by five hours to accommodate European members.
NYMEX Exchange of Futures for Swaps Program
The Commission approved a NYMEX proposal for exchange of futures for swaps (EFS) transactions. The NYMEX program authorizes the noncompetitive exchange of any NYMEX division futures contract for, or in connection with, EFS transactions under a three-year pilot program. EFS transactions are similar, in several respects, to exchanges of futures contracts for physicals (EFPs), which are expressly permitted by the CEA. NYMEX believes that EFS transactions will enhance the use of NYMEX as a risk transfer medium and centralized market and will aid in linking the on-exchange futures and off-exchange swaps markets.
NYMEX Option Pricing Model for Settlement
The Division allowed into effect NYMEX rules that alter the method by which option settlement premiums are calculated at the end of each trading day. According to NYMEX, the previous methodology resulted in settlement premiums that did not reflect option pricing techniques commonly used by most market participants. The new rules permit NYMEX to use an automated pricing tool for settling back-month contracts, consistent with procedures already in place in the exchange's Commodity Exchange, Inc., Division (COMEX) copper options market.
Merger of CFCCNY and CCC
The Division deemed approved rules submitted by the New York Board of Trade (NYBT) to facilitate the merger of the Commodity Futures Clearing Corporation of New York and the Commodity Clearing Corporation, the two clearing houses that served the Coffee, Sugar, & Cocoa Exchange, Inc (CSCE) and the New York Cotton Exchange (NYCE), respectively. The resulting clearing house, which clears all NYBT contracts, has the combined resources of both current clearing houses.
Use of EFPs for Inventory Financing
The Division allowed into effect resolutions submitted by the CSCE, the NYCE, and the Citrus Associates of the NYCE that authorize the use of EFPs for inventory financing. Under these resolutions, a member enters into an EFP transaction with a counterparty and grants that counterparty a non-transferable right to enter into a second EFP transaction on a date certain in the future that would have the effect of reversing the original EFP.
CME-BOTCC Cross-Margining Program
Division staff allowed into effect a proprietary and non-proprietary cross-margining proposal between the CME and the Board of Trade Clearing Corporation in May 1999. The proposal was the first cross-margining program to apply to all customers, not just certain "market professionals" as had been the case with all previous non-proprietary cross-margining programs. The proposal also is the first cross-margining arrangement to be limited to futures and options on futures contracts.
CFFE Placement of Limit Orders
The Division allowed into effect CFFE rules that enable the Cantor System to accept limit orders at prices away from the current market. As originally approved, the Cantor System's algorithm permitted bids or offers to be posted only at the best prices available at any given time.
Uniform Disclosure Statement
T&M staff worked with a joint committee of the NFA and industry members to develop a one-page uniform disclosure statement that could be used by all exchanges for electronic trading and order routing systems. Subsequently, the CBOT, CFFE, CME, and NYMEX proposed to use the new "Uniform Disclosure Statement for Electronic Trading and Order Routing Systems" in lieu of their current disclosure statements for automated systems. The Division allowed each of these proposals into effect without Commission approval.
CME Globex Error Trade Policy
The Division allowed into effect rule amendments to the CME's Globex Error Trade Policy. Under these amendments, the CME can impose administrative fees on market participants that use the Globex Error Trade Policy.
Trading by Non-Member Terminal Operators
The Division allowed into effect rule amendments submitted by the CBOT and the CME that allow authorized employees of a member firm to enter orders, with or without discretion, into the relevant exchange's electronic trading system for the proprietary account of the employing member without being registered with the Commission in any capacity. Employees who enter orders for the proprietary account of the employing member on a discretionary basis and enter or handle customer orders, with or without discretion, must be registered with the Commission.
CFFE Direct Trading Access
The Division has allowed into effect a CFFE proposal that permits certain classes of exchange members to enter orders directly into the order-matching system of the exchange via terminals provided by the exchange. Prior to the proposal, traders could enter trades only by relaying instructions to terminal operators working on behalf of the exchange to post bids or offers, or to hit aggressively posted bids or take posted offers. Only full members of the NYBT, clearing members of CFFE, and exchange-designated Market Makers are eligible for direct access. CFFE clearing members who are FCMs, however, may offer automated order routing systems to their customers. In such cases, customers may transmit orders to the Cantor System via the Internet or other electronic means provided that the FCM applies position and credit limit controls automatically to relevant customer accounts each time an order is placed in this manner.
NYMEX Post-Close Trading Session for Energy Futures Contracts
The Division allowed into effect, on a one-year pilot basis, a proposal by NYMEX to widen the permissible trading range of energy futures contracts during the post-close trading session. The amendment permits NYMEX energy futures contracts to trade during the post-close trading session at prices that were within the full range of prices of trades executed during the closing period.
CBOT and MidAmerica Commodity Exchange Rules on Bunched Orders
The Division allowed into effect CBOT and MidAmerica Commodity Exchange rules pursuant to the new Commission Regulation 1.35(a-1)(5) permitting certain bunched customer orders to be placed on U.S. futures exchanges without individual customer account identifiers either at the time of order placement or report of execution. Bunched orders may be placed by registered CTAs, investment advisors, and other regulated account managers (subject to certain conditions) on behalf of customers that have been identified previously as sophisticated "eligible participants" in Part 36 of the Commission's regulations.
COMEX Specialist Market Maker Program
The Division allowed into effect a COMEX proposal establishing a generic Specialist Marker Maker (SMM) Program. The SMM Program is intended to enhance liquidity in new or low-volume futures contracts. COMEX appoints a member or member firm to act as a market maker in a designated contract market. The SMM must maintain a continuous physical presence on the floor of the exchange throughout the regular trading session, manage a limit order book, and provide a two-sided market in the relevant contracts. The SMM is entitled to trading priorities and receives certain exchange funding.
The Division, working with the Office of Information Resources Management, completed a second on-site visit to FutureCom headquarters in Amarillo, Texas, to verify that certain clearing and compliance procedures were in place and, via a mock trading session, that the system had been adequately tested and was operating properly. This mock trading verification session raised a number of significant questions concerning the proper functioning of the trading system. Subsequently, FutureCom engaged a third-party auditor to conduct a system assessment.
Review of Exchange Emergency Actions
The Division reviewed an emergency action taken by CME and prepared a statutorily required report delivered by the Commission to Congress. The emergency action, taken in response to the inability of CME to establish a final settlement price using the ruble contract's ordinary cash settlement procedure, applied a new procedure for determining the final settlement price for the October 1998 ruble contract and the November 1998 ruble contract. The new settlement procedure used the CME/Emerging Market Trader's Association Reference Rate. The Division report concluded that it was appropriate for CME to permit temporary rules to remain in effect for the duration of the emergency.
The Division conducts a financial surveillance and audit program. The Division also oversees the self-regulatory programs of NFA and the exchanges, which include audits, daily financial surveillance, and other self-regulatory programs. The Division's programs include oversight of financial compliance programs of these SROs and direct quality control audits to assess the efficiency of SRO programs. Through this combination of direct examination and SRO oversight the Division ensures that required capital is maintained by FCM registrants and that customer funds are held in segregation by appropriate custodians. This oversight includes audits of clearing organizations and review of financial reports filed by registrants.
During FY 1999, the Division staff worked on a number of projects to enhance the financial oversight of the industry, including the following.
The Division issued Financial and Segregation Interpretation No. 4-2 permitting SROs, on an interim basis, to implement a risk-based auditing approach for the financial and sales practice audits of their respective member-FCMs.
FCM Financial Emergency
Griffin Trading Company (Griffin), an FCM, declared bankruptcy after one of its foreign-based customers traded on a foreign exchange in excess of his trading limits and then defaulted on his obligations. Griffin, in turn, defaulted on its obligations to its foreign clearing-brokers, which then seized all available customer money. No losses were sustained by customers trading on U.S. markets whose funds were in U.S. segregated accounts. However, non-defaulting customers whose funds were deposited in foreign accounts were not able to recover funds immediately. The Commission staff is working with the U.S. bankruptcy trustee, the foreign liquidator, and foreign regulatory authorities to return remaining funds to Griffin customers as soon as possible.
The Commission continued to move toward enabling registrants to file required reports electronically. Division regional staff in Chicago notified 50 CME and CBOT member-FCMs to discontinue filing financial reports in hard copy and to use electronic filing exclusively. Staff is implementing the same procedures for FCMs who file reports with the Commission's regional offices in New York and Kansas City. Approximately one-half of FCM registrants are not exchange members and therefore file required financial reports with the NFA. The staff is working with the NFA to facilitate electronic filing for non-member FCMs. An option being explored is to permit such non-member FCMs to file electronically with the NFA, which will transmit such reports to the Commission.
Other Oversight Activities
In FY 1999, activities of the Division's program in fostering the furtherance of sound financial practices of clearing organizations and firms holding customer funds also included:
· Review of 5,704 financial reports filed by registrants.
· Direct audits of 38 FCMs, CPOs, CTAs, and other registrants to test self-regulatory programs.
· Processing of 204 risk-assessment filings.
· Issuance of 308 warning and non-compliance letters.
· Investigation of 161 special required notices that report events such as reductions of capital of registered firms.
· Issuance of 1,452 CPO year-end guidance letters to assist such registrants in the preparation of required annual financial reports.
SRO Rule Enforcement Oversight
The CEA requires each exchange, through a program of continuing rule enforcement, to ensure that its members adhere to exchange rules. The Division oversees, reviews and reports to the Commission on the self-regulatory compliance programs of the exchanges. When appropriate, the reviews include recommendations for improvements and schedules for implementing those recommendations. During FY 1999, in connection with reviews of trade practice, market surveillance, audit and financial surveillance, and related SRO compliance programs, staff conducted reviews of the rule enforcement programs of the following exchanges.
Minneapolis Grain Exchange
The Division completed a review of Minneapolis Grain Exchange's (MGE) trade practice surveillance and disciplinary programs. The Division recommended that MGE implement procedures to improve the timeliness of investigations and establish written procedures that would limit severely the number of disciplinary warning letters that can be issued before monetary penalties or suspensions can be assessed. The Division also recommended that MGE examine the underlying reasons for the large number of staff departures.
The Division completed a rule enforcement review of COMEX that evaluated trade practice surveillance and disciplinary programs, as well as aspects of its audit trail. The Division found that COMEX generally maintains adequate trade practice and disciplinary programs and a program for conducting order ticket and trading card recordkeeping reviews. The Division made three recommendations to further improve these programs: COMEX should increase its required trading card compliance level similar to that in place for order ticket compliance and issue a notice to members reminding them of their trading card responsibilities; COMEX should ensure that investigation work papers are included in investigation files; and COMEX should order restitution in all settlements and disciplinary decisions where the amount of customer harm could be determined.
Chicago Mercantile Exchange
The Division completed a rule enforcement review of the CME that evaluated the exchange's market surveillance, trade practice surveillance, and disciplinary programs, and aspects of its audit trail. The Division found that the CME generally maintains adequate market surveillance and trade practice surveillance programs and generally maintains an adequate program for conducting back office audits to review clearing firms' and members' compliance with order ticket and trading card recordkeeping requirements. The Division also found that the CME maintains an effective disciplinary program. Nevertheless, the Division made several recommendations with respect to the CME's market surveillance and trade practice surveillance programs and its program for enforcing order ticket and trading card recordkeeping requirements.
Coffee, Sugar & Cocoa Exchange
The Division completed a rule enforcement review of the CSCE that evaluated the exchange's market surveillance, trade practice surveillance, and disciplinary programs. The Division found that the CSCE maintains an adequate market surveillance program and trade practice surveillance and disciplinary action programs. The Division made several recommendations that it believes will further improve each of these programs including: measures to improve the timeliness of investigations and documentation of the notification of non-members who violate speculative or hedge exemption limits; expanding the period of time trading activity is reviewed for members suspected of trading violations; considering brokers' profits during the course of investigations of suspected instances of accommodation trading; and issuing meaningful sanctions in all instances in which findings are supported by the evidence.
CBOT, CME, and NYMEX
The Division reviewed the self-regulatory programs of the CBOT, CME, and NYMEX in the areas of timeliness of audit completion, timeliness of reviewing financial reports, and staffing and training. The Division found that each exchange completed audits in accord with Commission guidelines and reviews of financial reports were completed in a timely manner. The levels of staffing and training at each exchange appeared appropriate to meet their oversight responsibilities.
Audit Trail and Dual Trading Exemptions
The Commission issued an order granting the CBOT an exemption from the statutory dual trading prohibition for the exchange's U.S. Treasury bond futures contract traded on Project A. The Commission amended that order on June 1, 1999 to include an exemption for the ten-year U.S. Treasury note futures contract traded on Project A. The Commission also issued an order granting the CSCE an unconditional exemption from the statutory dual trading prohibition for its cocoa futures contract. The Commission determined that, for these contract markets, the CBOT and CSCE maintain trade monitoring systems which are capable of detecting and deterring, and are used on a regular basis to detect and deter, all types of violations attributable to dual trading and, to the full extent feasible, all other types of trading violations.
Oversight of the National Futures Association
The Commission promotes self-regulation through delegation of authority to NFA and oversight of NFA activities, including the review of all proposed NFA rules and rule amendments. In addition, T&M coordinates regulatory efforts with the NFA. For example, T&M staff participate in and chair the Registration Working Group, which was established in 1995 and brings together NFA and Commission staff members to discuss registration issues of mutual concern. During FY 1999, the Registration Working Group participated in suggesting enhancements to the redesign of the NFA's databases, lent guidance to the NFA concerning factors to consider in statutory disqualification cases and how to treat respondents' claims of rehabilitation or mitigating circumstances, and reviewed methods for placing and removing "holds" on registration.
T&M staff also evaluate periodically how the NFA and CFTC can best use their resources to oversee the industry. In this connection, the Commission helped the NFA to redesign the "Clearinghouse of Disciplinary Information," the name of which was changed to "Background Affiliation Status Information Center" or "BASIC." BASIC is an electronic database that permits the user to access disciplinary information in connection with registrants. As of February 1999, the public can access BASIC through the NFA's website. The Commission also is aiding the NFA in its redesign of its comprehensive registration database, the Membership Registration Receivable System (MRRS.)
The following highlights work accomplished with regard to the NFA during FY 1999.
Two-Part Disclosure for CPO Disclosure Documents
The Commission approved amendments to NFA and related Commission rules to permit CPOs to disclose information with respect to offered pools with a two-part document. The first part of the disclosure document is short and concise, allowing customers to focus on material disclosures before deciding to invest in the pool. The second part of the document contains any additional items the CPO wants to disclose, provided such disclosures are not misleading. Two-part disclosure documents enhance the ability of prospective customers to focus upon the most important items of disclosure.
Delegation of Regulation 9.11 Responsibilities
To reduce the exchanges' regulatory reporting burden, the Commission approved the delegation to the NFA of certain regulatory responsibilities associated with Regulation 9.11, which requires exchanges to provide written notice to the Commission of disciplinary actions or access denial actions. The Commission issued an advisory informing the exchanges that they can directly file Regulation 9.11 disciplinary and access denial actions with the NFA, either electronically or in writing, rather than with the Commission. Although the exchanges are given the option of filing electronic or written notices, the advisory encourages the use of electronic filings because they are faster and more cost effective for both the exchanges and the NFA. Accordingly, the Commission also issued an order that delegates to the NFA the responsibility of collecting all Regulation 9.11 notices. The NFA is responsible for maintaining all disciplinary data in its database and is required to provide the Commission with management reports. The NFA will continue to make brokers' disciplinary histories available to the public on its website.
Mandatory Arbitration Proposal
The Commission approved a proposal to amend the NFA's member arbitration rules to make arbitration mandatory for all NFA members, except in certain circumstances. Under the NFA's previous rules, member respondents were subject to mandatory NFA arbitration with certain exceptions. However, while parties against whom claims were brought were subject to mandatory arbitration, parties with claims were not subject to mandatory arbitration and could bring a claim or dispute in an alternate forum. Under the amended rules, both claimants and respondents are subject to the same mandatory arbitration rules.
The Commission approved a proposal amending the NFA's compliance procedures to improve and expedite the disciplinary process. The amended procedures provide greater discretion to disciplinary hearing panel chairpersons to oversee and to manage the hearing process, including the ability to impose sanctions on those parties that abuse the hearing process.
The Commission approved amendments to its rules and those of the NFA governing the granting of a temporary license to applicants for registration in the categories of associated person, floor broker, floor trader, and guaranteed IB. These rule amendments give the NFA the discretion, in appropriate cases, to issue a temporary license to an applicant despite a "yes" answer to a disciplinary history question on the application for registration. The Division also allowed into effect amendments to NFA rules to allow the NFA to terminate a temporary license if principals of a guaranteed IB fail to disclose disciplinary history or if the principals become subject to a disciplinary action before registration is granted.
Treatment of Orders Eligible for Post-Execution Allocation
The Division allowed into effect a proposed interpretive notice to NFA Compliance Rule 2-10. The interpretive notice addresses the responsibility of FCMs that carry accounts receiving post-execution allocations, pursuant to Commission Regulation 1.35(a-1)(5), to ensure that only eligible accounts receive such allocations. The interpretive notice provides that the carrying FCM may, in situations such as give-ups where the FCM needs to obtain information from other sources to ensure that included accounts have been identified as eligible accounts, choose to test on a regular basis a sample of its accounts receiving allocations to ensure that only eligible accounts are included.
Review of NFA's Telemarketing Supervision Program
The Division completed a review of the NFA's telemarketing supervision program. The Division reported that NFA's program generally meets the Commission's requirements, although the Division made some recommended corrections or enhancements to the NFA's program.
Review of NFA's CPO/CTA Disclosure Document Review Program
The Division completed a review of the NFA's disclosure document review program of CPOs and CTAs and reported that its program generally meets the Commission's requirements. The review of NFA's operation and implementation of this examination program was the first one conducted by the Division since the delegation of this function to the NFA in FY 1998.
Financial Oversight Coordination
T&M maintained strong working relationships with other financial oversight organizations and groups such as the President's Working Group on Financial Markets. In particular, T&M participated in and wrote several sections of the President's Working Group on Financial Market's study, Hedge Funds, Leverage, and the Lessons of Long Term Capital Management. The Commission also is participating in the working group's study of the over-the-counter derivatives market.
Civil Monetary Penalty Collection Program
T&M, in cooperation with the Division of Enforcement, operates a civil monetary penalties collection program to reinforce Commission sanctions by assuring vigorous pursuit of penalties assessed. During FY 1999, the Commission collected approximately $22,165,000 in penalties.