Release: 3879-95 For Release: November 14, 1995
The review was initiated to assess the level of exchange compliance with the Commission's September 1989 interpretation on outtrades, which addressed concerns that arose as a result of the CFTC/FBI investigation into trading at CME and CBT. More recently, the importance of error trade surveillance was underscored by the collapse of Barings PLC, which involved significant use of a firm error account. In light of this case, the Division reviewed each exchange's surveillance program for error trades to ensure that it was adequate to monitor for this type of abuse.
The Division found that each exchange collects and maintains adequate audit trail data to reconstruct the resolution of errors, unmatched trades, and outtrades. Except at CBT and CME, however, the exchanges' audit trails for errors do not include the regular identification to the exchanges of accounts used by traders for error trades. In addition, all exchanges do not regularly identify accounts used by firms for error trades. Thus, the Division recommended that the exchanges regularly identify these accounts.
The exchanges conduct surveillance using computerized reports that focus on various factors that may indicate a suspicious outtrade, including changed brokers or prices, unusually large profits or losses from outtrades, and unusually large numbers of outtrades by exchange members. Although the exchanges' current programs include surveillance for most of these factors, the Division recommended that exchanges monitor for all such factors.
The majority of exchanges maintained well-documented disciplinary action case files for offenses involving outtrades. In most cases, disciplinary actions resulted in adequate penalties. In several cases, however, certain exchanges did not fine members who apparently engaged in trade practice violations to resolve outtrades. The Division recommended that exchanges act aggressively in disciplining members for trade practice violations involving errors, unmatched trades, and outtrades by levying sanctions sufficient to deter future similar violations.
The exchanges will have 60 days to respond to each of the Division's recommendations. Copies of the Division's report are available from the Commission's Office of Public Affairs, Three Lafayetter Centre, 1155 21st Street, N.W., 9th floor, Washington, D.C. 20581.