For Release: March 3, 1998
CFTC Notifies the New York Cotton Exchange of Its Results of a Rule Enforcement Review
The Commodity Futures Trading Commission (Commission) has notified the New York Cotton Exchange (NYCE or Exchange) of the results of a limited-scope rule enforcement review completed by the Commission's Division of Trading and Markets (Division). The purpose of the review was to evaluate NYCE's market surveillance program for compliance with Sections 5a(a)(8) of the Commodity Exchange Act (Act) and Commission Regulation 1.51(a)(1). The Division's review covered the period February 1, 1996 to February 1, 1997.
The Division found that the Exchange has improved its large trader reporting system by using software packages that monitor and better analyze reportable position information. The MSD can retrieve reportable position and account identifying information based on specifically selected criteria through the use of the Exchange's on-line market surveillance system and customized software query program.
The Division also found that the Exchange improved its speculative limit enforcement program through improved automation. However, further enhancements are needed. Specifically, the Division recommended that the Exchange give additional weight to whether requested speculative limit exemptions are too large relative to the liquidity available in a market, particularly in the spot month; automate the monitoring of position data relative to approved hedge exemption levels to detect more readily traders whose positions may exceed their exemptions; and be more diligent in updating hedge exemption applications. The Division found instances where hedge exemption applications had not been updated for several years.
In addition, the Division found that the Exchange conducted market surveillance inquiries in a timely manner and were generally well documented. However, the Division also found that the Exchange does not maintain a log of MSD inquiries, or those inquiries that are referred to the Compliance Department and converted to investigations. Nor does the MSD maintain a log of hedge exemptions granted and the staff activity related to those exemptions. The Division recommended that the Exchange improve its ability to monitor the progress of MSD inquiries and referrals to the Compliance Department, and the status of hedge exemption applications, by developing automated logs for each category. The Division also recommended that the Exchange be more diligent in referring significant reporting and speculative limit violations to the Compliance Department for possible issuance of staff warning letters or other action.
Finally, the Division found that the Exchange's Market Surveillance Department's (MSD) staffing levels were insufficient to monitor effectively the number of markets traded on the Exchange, and to conduct other routine surveillance activities, including the review of EFPs. The Division found that there were no EFPs reviewed by the Exchange during the target period. Therefore, the Division recommended that the Exchange increase the size of its MSD staff so that all requisite surveillance activities, including the routine review of EFPs, can be conducted. The Division noted in its report that NYCE has already begun taking steps to alleviate this problem by recruiting additional staff and transferring another employee to the MSD. In addition, the Division recognizes that its recommendation concerning MSD staffing levels may also be affected by the impending merger of NYCE and the Coffee, Sugar & Cocoa Exchange, Inc.
The Division's report sets forth these 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.