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Outcome Objective 3.3

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Outcome Objective 3.3: Markets are free of trade practice abuses.

Performance Measure 3.3.1


Performance Measure 3.3.1: Percentage of exchanges deemed to have adequate systems for detecting trade practice abuses.
Status: Effective
Data Source: Agency reports and files from reviews and analyses, and documentation from exchanges subject to a rule enforcement review.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits.
ACTUAL
FY 2006
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
PLAN
FY 2009
100% 100% 100% 100% 100%

Lead Program Office

Division of Market Oversight

Performance Analysis & Review

DMO staff conduct RERs of DCMs on a regular cycle that includes review and analysis of exchange programs for detecting trading abuses and violations of exchange rules. In FY 2009, DMO completed an RER of the MGE and was working to complete a RER of ICE US. In addition, DMO initiated a joint RER of the CME and CBOT that is expected to be completed in FY 2010. In the course of conducting RERs and daily surveillance of all futures exchanges, DMO has not found any exchange to have inadequate systems in place for detecting trade practice abuses.

DMO also conducts ongoing daily surveillance of all exchanges to ensure that exchanges are enforcing their rules.

Performance Highlights

DMO found in its RER report for the MGE that the exchange maintains an adequate open outcry audit trail and trade practice surveillance program to detect trading abuses. The MGE uses an automated trade surveillance system to identify and investigate potential trading violations. DMO recommended, however, that the MGE increase the staffing level of its compliance group, examine the underlying reasons for the large number of compliance staff turnover during the review period, and augment its audit trail compliance program for electronic trading. DMO also found that the MGE maintains an effective market surveillance program that includes daily surveillance to identify possible manipulation, and to ensure orderly liquidation of expiring contracts.

Performance Measure 3.3.2


Performance Measure 3.3.2: Percentage of exchanges that comply with requirement to enforce their rules.
Status: Effective
Data Source: Agency reports and files from reviews and analyses, and documentation from exchanges subject to a review.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits.
ACTUAL
FY 2006
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
PLAN
FY 2009
100% 100% 100% 100% 100%

Lead Program Offices

Division of Clearing and Intermediary Oversight
Division of Market Oversight

Performance Analysis & Review

Division of Clearing and Intermediary Oversight: Performance target was met for FY 2009. Two reviews to assess the financial surveillance programs of SROs and one review to assess an SRO’s arbitration program were completed in FY 2009.

CFTC Core Principle 11 provides, in relevant part, that a DCM shall establish and enforce rules to ensure the financial integrity of FCMs and the protection of customer funds. DCMs, in their capacity as SROs, receive and review monthly financial reports submitted by FCMs for the purpose of assessing whether the FCMs are in compliance with the Commission’s and the SRO’s minimum financial requirements, including requirements related to the safeguarding of customer funds. In addition, Commission regulations and SRO rules require an FCM to file a notification with the Commission and the FCM’s designated SRO whenever the SRO fails to meet capital and segregation requirement.

DCIO conducts periodic, routine examinations of the financial and sales practice programs of the SROs for the purposes of reviewing the effectiveness of such programs; in addition, DCIO accesses the SROs’ compliance with applicable CFTC Core Principles, Commission regulations, and staff interpretations. DCIO also reviews the programs of registered futures associations for compliance with Section 17 of the Act. DCIO’s examinations of SROs generally involve an assessment of some or all of the following areas: the level of staffing dedicated by the SRO to conduct financial and sales practice review of FCMs; the conduct of infield examinations of FCMs; the review of financial statements and regulatory notices; the review of the FCM’s maintenance of required books and records; and the review of the SRO’s disciplinary program.

Division of Market Oversight: DMO staff conduct RERs of DCMs on a regular cycle to ensure that exchanges monitor and enforce compliance with their rules, as required by CFTC Core Principle 2. Such reviews may examine some or all of a DCMs audit trail, market surveillance, trade practice surveillance, disciplinary, and dispute resolution programs. When DMO examines any of these programs, its review includes an analysis designed to ensure that the DCM is enforcing its rules that relate to the particular program under review. In FY 2009, DMO completed an RER of the MGE that thoroughly examined the Exchange’s market surveillance, audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. DMO was working to complete a review of the self-regulatory programs at ICE US futures and initiated joint a RER of the CME and the CBOT. The ICE US, CME, and CBOT reviews are expected to be complete in FY 2010.

DMO also conducts ongoing daily surveillance of all exchanges to ensure that exchanges are enforcing their rules. DMO has not identified any material deficiencies at either exchange.

Performance Highlights

Division of Clearing and Intermediary Oversight: DCIO completed reviews of two SROs’ financial surveillance programs that focused on the SROs’ oversight of member FCMs’ compliance with the CFTC and SRO minimum financial and related reporting requirements. Staff concluded that the SROs conducted their financial and sales practice programs in compliance with applicable provisions of the Act and Commission regulations and staff interpretations. DCIO also completed a review of an SRO’s arbitration program for the settlement of customers’ claims or grievances against any member or employee of a registered futures association. DCIO determined that the SRO’s arbitration program was in compliance with applicable provisions of the Act and Commission regulations. DCIO is in the process of conducting a third review of an SRO’s financial surveillance program that will not be completed until FY 2010, and is finalizing a review of an SRO’s registration program that also will be completed in FY 2010.

Division of Market Oversight: DMO found in its RER report for the MGE that the exchange maintains an adequate open outcry audit trail and trade practice surveillance program to detect trading abuses. The MGE uses an automated trade surveillance system to identify and investigate potential trading violations. DMO recommended, however, that the MGE increase the staffing level of its compliance group, examine the underlying reasons for the large number of compliance staff turnover during the review period, and augment its audit trail compliance program for electronic trading. DMO also found that the MGE maintains an effective market surveillance program that includes daily surveillance to identify possible manipulation, and to ensure orderly liquidation of expiring contracts.