CFTC Releases Rule Enforcement Review of the New York Mercantile Exchange
Washington, D.C. - The Commodity Futures Trading Commission (Commission) has notified the New York Mercantile Exchange (NYMEX) of the results of a rule enforcement review completed by the Commission’s Division of Market Oversight (DMO). DMO assessed NYMEX’s compliance with those core principles that relate to audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. The target period for the review was January 1, 2003 through December 31, 2003.
DMO found that NYMEX maintains an adequate audit trail program that allows NYMEX to assign one-minute trade times that are based on pit card timestamps and to reconstruct trading. NYMEX also provides for the recording and safe storage of trade information in a manner that allows staff to use the information to detect and prosecute rule violations. The Division, however, found two aspects of NYMEX’s audit trail program that should be enhanced. First, members demonstrated a significantly higher level of pit card submission timeliness for outright trades than for spread trades. DMO, therefore, recommended that NYMEX include spread trades in its trade timing summary enforcement program. Second, DMO found that the selection methodology used for order ticket recordkeeping reviews does not provide for sufficient coverage of NYMEX’s floor population, and recommended that NYMEX increase the number of broker groups and individual brokers reviewed annually in order ticket reviews.
DMO also found that NYMEX maintains an adequate trade practice surveillance program. NYMEX uses floor surveillance and a computerized trade practice surveillance system to monitor its markets. Investigations were thorough and well documented, and investigation reports included sufficient analysis to support staff’s conclusions. In addition, investigations were completed in a timely manner.
During the target period, NYMEX took disciplinary action in 16 separate cases, all resolved pursuant to settlement agreements. Although the sanctions imposed in a majority of the cases appeared reasonable relative to the violations committed, DMO identified five cases in which a disciplinary committee did not follow the Compliance Department’s recommendations for more substantial sanctions, including sanctions imposed on some repeat offenders. In addition, in two of the five cases, restitution was calculated and recommended by Compliance staff, but not included in the final settlements. Therefore, DMO recommended that disciplinary committees give careful consideration to Compliance staff’s recommendations, and, if a committee’s sanctions ultimately differ from those recommended by staff, articulate their rationale in committee minutes. DMO further recommended that disciplinary committees ensure that all sanctions and settlements are sufficient to serve as an effective deterrent, particularly with respect to repeat offenders, and that restitution be ordered where the amount of customer harm can reasonably be determined.
Finally, DMO found that NYMEX customers are provided voluntary dispute resolution through arbitration rules that are fair and equitable. DMO found that the one arbitration resolved during the target period conformed with NYMEX’s arbitration rules and procedures and was completed in a timely manner.
NYMEX will have 60 days to respond in writing to DMO’s recommendations. Copies of the report are available from the Commission’s Office of External 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.
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