For Release: October 1, 1997
CFTC COMPLETES COMPREHENSIVE HORIZONTAL RULE ENFORCEMENT REVIEW
OF EXCHANGE BROKER ASSOCIATION PROGRAMS
WASHINGTON -- The Division of Trading and Markets (T&M) of the Commodity Futures Trading Commission (Commission) has completed a comprehensive "horizontal" or "issue-based" rule enforcement review of the broker association (BA) programs in place at the Chicago Mercantile Exchange (CME), the Chicago Board of Trade (CBT), the Coffee, Sugar & Cocoa Exchange, Inc. (CSCE), the New York Mercantile Exchange (NYMEX) and its Commodity Exchange, Inc. (Comex) Division, and the New York Cotton Exchange, and its wholly-owned subsidiary, the New York Futures Exchange.
The purpose of T&M's Review was to evaluate each exchange's broker association program for compliance with Sections 4j(d)(1) and (2) and 5a(a)(13) of the Commodity Exchange Act (CEA) and Part 156 of the Commission's regulations. T&M also sought to develop information relevant to allegations made regarding broker association activity, particularly at the CME. As part of its Review, T&M assessed each exchange's program for the registration of, and collection of data on, broker associations and their members, restrictions relating to the trades that members of the same broker association can execute opposite each other, and relevant surveillance programs for monitoring BA member trading activities.
In the Review, T&M made findings concerning the manner in which each exchange conducts its broker association compliance program and made recommendations for improvements as appropriate. The Review contains specific recommendations to each exchange to address circumstances particular to that exchange's broker association program. T&M also made recommendations, including those that T&M considers to be best practices, that extend to all of the exchanges to improve exchange programs for the registration, collection of data, and oversight of broker associations and their members.
T&M determined that each exchange has certain core elements in its broker association program that are common to all exchanges. For example, T&M found that all of the exchanges examined have rules explicitly defining the term "broker association," which generally mirror the definition of a broker association set forth in Commission regulation 156.1. In addition, each exchange requires the registration of broker associations and their members and each exchange's records of registration generally are in compliance with the information content requirements of the Commission's regulations.
T&M also found that some aspects of each exchange's broker association program are unique to that exchange. For example, CME imposes restrictions on the percentages of trades that associated members can execute opposite each other in six specific high volume markets. At the CBT, percentage limitations are imposed in its T-Bond pit, which is its highest volume market. At three of the New York exchanges, NYMEX, Comex, and CSCE, customer orders that are executed between members of the same association are considered cross trades and must be executed in accordance with cross trade limitations and procedures. Similarly, although all exchanges use their routine surveillance systems to monitor the trading activities of associated members, some exchanges include programs and reports that focus more directly on broker association members and their trading patterns.
T&M also conducted limited independent trade practice investigations to identify any indications of violative trading activity that could be attributed to members of those associations, acting independently or in cooperation with their fellow members. Based on data for the period reviewed, it appeared that broker association members tended not to trade with each other and the data did not indicate that broker association members favored particular locals to the exclusion of others on the floor.
Among other things, T&M recommended that each exchange's broker association program: (1) include procedures that provide for the disclosure to the respective exchange and the Commission of business and financial agreements or arrangements among or between broker association members in accordance with Section 5a(a)(13) of the CEA; (2) include a definition of an "authorized representative's" responsibilities in order to facilitate current, accurate and updated BA registration information; (3) prohibit non-Commission registrants, and persons who are not principals thereof, from investing in a broker association and consider whether it is inappropriate to permit investors as participants; (4) improve notice to the public of the availability of BA membership lists, including through the use of Website homepages; (5) enhance current surveillance systems and programs that monitor BA member trading activities to focus more directly on trades executed by associated members; and (6) include procedures that address the allocation of pit space and that prohibit the transfer of pit space by sale.
As to the CME, T&M found that its broker associations are more formal than those at other exchanges and that the CME permits its principals to be affiliated with more than one association. T&M recommended that CME review the desirability of, and assess the patterns of, cross-ownerships and financial relationships among exchange members who are associated with different associations in various capacities. T&M specifically requested that the CME provide T&M with a report that examines the structures of broker associations and their related contractual agreements, trading activity and other empirical data. During the course of the Review process, the CME created a Broker Association Task Force to address broker association-related issues.
T&M believes that implementing the various recommendations will facilitate improvements to exchange self-regulatory programs for monitoring broker associations and regulating their trading practices. The exchanges are expected to respond to T&M's recommendations by November 30, 1997.
A copy of the Review may be obtained by contacting the Commission's Office of Public Affairs, Three Lafayette Center, 1155 21st Street, N.W., Washington, DC 20581, (202) 418-5100. The Commission also expects that the Review will be available in the near future by accessing the Commission's Website homepage at www.cftc.gov.