For Release: August 12, 1996
Results of a NYMEX Recent Rule Enforcement Review
The Commodity Futures Trading Commission (CFTC) has notified the New York Mercantile Exchange ("NYMEX" 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 review evaluated NYMEX's compliance with provisions of the Act and Commission regulations with regard to its market surveillance, trade practice surveillance and disciplinary programs and audit trail systems. The Division found that the Exchange maintains generally adequate programs in all four areas.
The review covers the period of April 1, 1994 to June 30, 1996. For purposes of statistical analyses, the Division used a 12-month "statistical review period" of April 1, 1994 to March 31, 1995. With respect to trade timing data, the Division used the statistics cited in the Commission's June 1995 Report on Audit Trail Accuracy and Sequencing Tests ("Audit Trail Report").
The Division found that NYMEX's market surveillance program includes, among other things, monitoring for indications of possible market congestion and other situations which could interfere with the orderly liquidation of expiring contracts. In addition, the Exchange investigates selected exchange of futures for physicals transactions to determine whether such transactions are bona fide. The Division also found that NYMEX enhanced its hedge exemption application by including information with respect to, among other things, risk management structure and supervision of trading and risk management.
The Division also found that NYMEX maintains adequate disciplinary and trade practice surveillance programs. Disciplinary matters are promptly referred to disciplinary committees, disciplinary action is taken in a reasonably timely manner, findings appear to be supported by the evidence, and penalties appear reasonable relative to the conduct being sanctioned. With regard to its trade practice surveillance program, the Division found that investigations are thorough and well documented and investigation reports generally complied with Commission regulations. Additionally, the Exchange is testing a newly-developed computerized trade surveillance system to be used in conjunction with its existing surveillance systems.
However, the Division found that NYMEX needs to take action to improve the timeliness of completion of investigations. The Division found that 37 percent of all trade practice investigations closed during the statistical review period, and 44 percent of those originated by customer complaint, were completed within the four-month requirement of Regulation 8.06. During the meeting at which it received the review, the Commission expressed concern that the Exchange was not completing investigations, particularly those involving customer complaints, in a timely manner. In this connection, the Division recommended that NYMEX take immediate steps to revise its procedures to more promptly complete the investigation of customer complaints and expedite the completion of all trade practice investigations in order to improve compliance with Regulation 8.06.
In its review of NYMEX's audit trail system, the Division found that the Exchange's audit trail captures essential data on trades, including data on unmatched trades and outtrades. Based upon the comprehensive tests conducted as part of the Commission's Audit Trail Report, the Exchange's one-minute trade timing accuracy rate averaged approximately 91 percent, subject to needed sequencing improvements. In this regard, the Division recommended that NYMEX continue to implement the recommendations made in the Audit Trail Report.
The Division also found that the Exchange generally has a comprehensive program for monitoring member compliance with trading card and order ticket recordkeeping requirements. The Division found, however, that member compliance with the requirement to identify transactions executed during the close is not adequate and recommended that NYMEX take additional steps to increase member compliance with this recordkeeping requirement. The Division found that the Exchange, based on a recommendation in the Audit Trail Report, has integrated pit card times with trading card sequence data by developing an integrated pit card/ trading card record. The Division recommended that NYMEX monitor the use of the integrated card to validate the anticipated improvement in membership compliance with the requirement to record transactions in exact chronological order of execution on sequential lines of the card.
The Division's report sets forth these and other specific recommendations for improvement in the Exchange's market surveillance and trade practice surveillance programs and audit trail systems. NYMEX will have 60 days to respond to those 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.