For Release: October 18, 1996
The Commodity Futures Trading Commission (Commission) has notified the Coffee, Sugar & Cocoa Exchange, Inc. (CSCE or Exchange) of the results of a rule enforcement review completed by the Commission's Division of Trading and Markets (Division). The review was conducted, in part, to comply with section 8e of the Commodity Exchange Act (Act), which requires that the Commission, at least once every two years, to the extent practicable, assess whether each exchange's trade monitoring system satisfies certain statutory requirements.
The Division's review, which focused on the period of September 1, 1994, to September 1, 1995, found that CSCE's market surveillance, audit trail, trade practice surveillance and disciplinary programs generally were adequate.
The Division found that the Exchange's Market Surveillance Department (MSD) identifies indications of possible congestion or other market situations conducive to possible price distortion and ensuring the orderly liquidation of expiring contracts. The Division also found that the Exchange's computerized large trader reporting system is sufficient for monitoring the positions of large traders, aggregating related accounts, and detecting potential speculative position limit or hedge exemption limit violations. In addition, the MSD contacts accounts that approach or exceed speculative position or hedge exemption limits. However, the Division found that large cash-and-carry exemptions to speculative position limits may result in undue market concentration and may present a potential for disorderly liquidation of an expiring contract. Therefore, the Division recommends that the Exchange not approve cash and carry exemptions from spot month speculative position limits that are excessively large relative to deliverable stocks or the total delivery capacity on the expiring contract.
The Division found that the Exchange's audit trail captures essential data on trades, including data on unmatched trades and outtrades. The Exchange's one-minute trade timing accuracy rate and sequencing results exceeded 90 percent. Although members generally were in compliance with most order ticket requirements, only 58 percent of the order tickets examined by the Division in an independent review had an identifiable order number. The Division recommends that the Exchange improve member compliance with the Commission's order number recordation requirement.
The Division also found that the Exchange has an adequate trade practice surveillance program. The Exchange has made significant progress in the development of its computerized trade practice surveillance system, the Compliance Analysis Review System (CARS II), which allows users to create customized reports and also has resulted in the creation of several new computerized trading reports. Investigations examined generally were thorough, well documented and completed in a timely manner. Although the Division was able to determine from the Exchange's floor surveillance log that surveillance was conducted daily during the review period, the Division could not confirm that surveillance occurred as often as required by the Exchange's procedures. Therefore, the Division recommends that the Exchange require staff to record all floor surveillance activities in the floor surveillance log.
Finally, the Division found that CSCE has an adequate disciplinary program. However, the Division found one case, involving apparent noncompetitive trading during a trading suspension in an opening call, that it believes resulted in insufficient sanctions. Consequently, the Division recommends that the Exchange's Business Conduct Committee (BCC) issue meaningful sanctions against members who disregard the directions of the caller with respect to suspensions of trading during the opening/closing call.
The Division's report sets forth these and other specific recommendations for improvement. The Exchange will have 60 days to respond to the recommendations.
Copies of the Division's report are available from the Commission's Office of Public Affairs, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, (202) 418-5080.