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Outcome Objective 1.1

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Outcome Objective 1.1: Futures and option markets that accurately reflect the forces of supply and demand for the underlying commodity and are free of disruptive activity.

Performance Measure 1.1.1



Performance Measure 1.1.1: Percentage growth in market volume.
Status: Adequate
Data Source: Exchange’s Trading Volume Data.
Verification: Exchange Data compared to Futures Industry Association (FIA) Report.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
27% 12.8% -22.1% 15.7% 28%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

15.7%

Performance Analysis & Review

The percentage growth in the market increased at a rate of 15 percent for FY 2010. However, excluding the first quarter of FY 2010, volume increased at just over 20 percent. October 2009 was almost 17 percent down from October 2008. At the close of FY 2010, volume returned to an upward swing of about 20 percent annually as the economy looks to recover. This increase is due to both many new products created as well as products already in existence. Volume had been steadily increasing through the summer months of 2008 at a rate of about 25 percent annually. At that time, volume dropped quite a bit from previous years with the economic downturn. However, when looking at FY 2010, the volume trend looks to be returning to historical growth levels.

Performance Highlights

None to report.

Performance Measure 1.1.2



Performance Measure 1.1.2: Percentage of novel or innovative proposals or requests for CFTC action addressed within six months to accommodate new approaches to, or the expansion in, derivatives trading, enhance the price discovery process, or increase available risk management tools.
Status: Moderately Effective
Data Source: Formal filings and signed letter responses by the Commission.
Verification: Formal filing and disposition dates maintained in internal tracking system.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 75% 100% 75%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

During the fiscal year, DMO handled a number of formal and informal proposals or requests for Commission action that included newer approaches to derivatives trading or enhancements to the price-discovery process. The items, which included innovative products and exchange processes, were all addressed within six months of formal receipt.

Performance Highlights

DMO issued an August 20, 2009, letter amending the foreign board of trade no-action relief letter for ICE Futures Europe and imposing new conditions for the listing of a contract that settles against any price of a contract listed for trading on a DCM or derivatives transaction execution facility, or a contract listed for trading on an exempt commercial market that has been determined to be a significant price discovery contract (SPDC). The additional conditions are that ICE Futures Europe: 1) provide CFTC staff with trade execution and audit trail data for all linked contracts, copies of, or hyperlinks to, all rules, rule amendments, circulars and other notices published by the exchange, and copies of all Disciplinary Notices involving the linked contracts; 2) provide for CFTC on-site visits to examine ICE Futures Europe’s ongoing compliance with its no-action relief; and 3) in the event that the CFTC, directs that NYMEX take emergency action with respect to a linked contract (e.g., to cease trading in the contract), ICE Futures Europe, subject to information-sharing arrangements between the CFTC and the U.K. Financial Services Authority, will promptly take similar action with respect to the linked contract at ICE Futures Europe.

DMO issued a May 11, 2010 letter granting no-action relief to permit the International Maritime Exchange ASA (the Exchange) to make its electronic trading and order matching system and its Application Program Interface available via direct access to Exchange trading members in the United States without obtaining contract market designation or registration as a derivatives transaction execution facility pursuant to Sections 5 and 5a of the CEA.

DMO issued a July 27, 2010 letter to ICE extending ICE’s deadline until August 18, 2010, to provide a written demonstration of compliance with the core principles with respect to its SPDCs core principle regime. Based on a review of the documentation submitted by ICE and an on-site review of ICE’s electronic trading platform, DMO staff determined that ICE demonstrated by the August 18, 2010 deadline its compliance with the core principles and Commission regulations.

DMO also reviewed and processed the proposed listing of 20 new contracts to ensure that the submitting exchange had appropriate market surveillance and additional information sharing measures in place as necessary. The 20 contracts were submitted by 10 different exchanges: MexDer (2 and 10 year Interest Rate Swap futures contracts based on the 28-Day Interbank Equilibrium Interest Rate), the Sydney Futures Exchange (Renewable Energy Certificate futures and options contracts), Eurex Deutschland (Hurricane futures contracts, Skimmed Milk Powder futures contracts and Butter futures contracts) LIFFE (Short Gilt futures contracts and Medium Gilt futures contracts), ICE Futures Europe (Argus Sour Crude Index futures contract, Argus Sour Crude Index Differential futures contract and TTF Natural Gas futures contract), London Metal Exchange (Molybdenum futures contract and Cobalt futures contract), SGX-DT (Fuel Oil 380cst [FO 380] futures contract), Bourse de Montreal (Canadian Heavy Crude Oil Differential Price futures contract and Options on Three-Month Canadian Bankers’ Acceptance futures), Euronext Paris (Malting Barley futures and options contracts) and the European Energy Exchange (Phelix Off-Peak futures contracts and Phelix Off-Peak Week futures contracts).

Performance Measure 1.1.3



Performance Measure 1.1.3: Percentage increase in number of products traded.
Status: Effective
Data Source: Exchanges submit data on trading volume, open interest, delivery notices, exchange of futures and prices for all products traded.
Verification: Data is validated by internal program edits and quality checks in central database.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
20% 11.4% 22.7% 25.6% 10%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

25.6%

Performance Analysis & Review

The number of products traded grew by approximately 25.6 percent in FY 2010. Part of the reason for the increase is the recovery from the economic downturn of FY 2009. There was also growth in the number of new products offered on the exchanges during FY 2010. Most of these new contracts were slight variations of existing contracts or attempts to duplicate existing products in the OTC arena. Futures innovation in energy products and the introduction of a large number of new SFPs drove the increase.

Performance Highlights

None to report.

Performance Measure 1.1.4(a)



Performance Measure 1.1.4(a): Percentage of new exchange applications completed within expedited review period.
Status: Effective
Data Source: New exchange application(s).
Verification: Filings and Actions automated database tracks and calculates processing time from receipt date through to date of designation or registration. Agency files containing applications, staff reviews, memoranda to the Commission, and proposed Orders.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% N/A1 33.3% 25%
1The applicants of two fast track submissions were taken off the fast track review. (back to text)

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

33.3%

Performance Analysis & Review

During FY 2010, DMO staff reviewed three formal DCM applications. Two applications were removed from expedited review due to incomplete applications as well as novel issues requiring extra staff time. One market was designated within the statutory time period; a second was designated several weeks after the statutory time period due to serious questions that were brought to the Commission shortly before the end of the statutory period, which raised questions for the Commissioners. After an extension from the applicant, staff provided further information to the Commissioners, and the Commission then designated the exchange. A third applicant was designated within the expedited review period.

Performance Highlights

None to report.

Performance Measure 1.1.4(b)



Performance Measure 1.1.4(b): Percentage of new clearing organization applications completed within expedited review period.
Status: Effective
Data Source: New DCO application(s).
Verification: Filings and Actions automated database tracks and calculates processing time from receipt date through to date of designation or registration. Agency files containing applications, staff reviews, memoranda to the Commission, and proposed Orders.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% N/A1 100% 100%
1The applicants of two fast track submissions voluntarily requested to be taken off the fast track for review. A third application did not qualify for fast track review. (back to text)

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

DCIO met the performance target for FY 2010. Two DCO applications were submitted under the fast track mode (90 days). One applicant was required to resubmit its DCO application due to its inclusion of a credit default swap service during the submission period. The second applicant’s DCO application was removed from the fast track mode and placed on the 180-track mode, the normal statutory processing time for a DCO application.

Performance Highlights

None to report.

Performance Measure 1.1.5



Performance Measure 1.1.5: Percentage of new contract certification reviews completed within three months to identify and correct deficiencies in contract terms that make contracts susceptible to manipulation.
Status: Marginal
Data Source: Exchange certification filings, certified rule amendments, and agency memoranda.
Verification: Filings and Actions automated database tracks and calculates processing time from receipt date through to date of designation or registration.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
82% 82% 71% 37% 70%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

37%

Performance Analysis & Review

In FY 2010, as in the previous fiscal year, a large proportion of new contract certifications concerned weather indexes and SFPs. Those contracts typically are easier to review than other contracts. However, there also were a high number of niche energy and power contracts that raised significant regulatory concerns, and a number of environmental contracts that appeared to suffer contract design flaws. The performance result in FY 2010 was significantly lower than expected because of: 1) an increasing backlog of new product certifications; 2) added responsibilities to review contracts traded on ECMs to determine whether such contracts perform a significant price discovery function; and 3) a shift in resources to write proposed rules to implement the Dodd-Frank Act. Because of the limited staff available to conduct new product due-diligence reviews, DMO staff typically prioritizes its reviews based on observed trading volume and open interest.

U.S. exchanges continued to innovate in FY 2010. Two recently DCMs, Cantor Exchange and Trend Exchange, designed and sought approval of contracts based on movie box office receipts. The NYMEX and CCFE expanded their product lines of pollution allowances, including additional contracts based on the carbon allowances and sulfur allowances. NYMEX also listed for trading several freight rate futures contracts. The CME expanded its agricultural products line with cheddar cheese futures and options, international skim milk futures and options, and crude palm oil futures. The Nasdaq-OMX futures exchange broadened its interest rate swap offerings with several forward rate agreements of various terms. These contracts are designed to closely replicate OTC swap contracts. It is reasonable to expect that exchanges will continue to introduce novel and complex products in the future.

Performance Highlights

Commission staff completed reviews of over 775 new contract certifications and identified contract design flaws in several contracts. In addition, Commission staff completed economic reviews of three foreign stock index futures contracts to ensure that the contracts meet the Commission’s cash-settlement price standards, are not readily susceptible to manipulation, and are based on broad-based security indexes.

Commission staff continued to review contracts listed on ECMs, pursuant to rules adopted by the Commission in FY 2009, to determine whether those contracts perform a significant price discovery function. Commission staff have identified 13 such contracts that have been, or will be, published for comment. ECMs that list SPDCs are subject to increased regulatory oversight by the CFTC.

Performance Measure 1.1.6



Performance Measure 1.1.6: Percentage of exchange rule change certification reviews completed within three months, to identify and correct deficiencies in exchange rules that make contracts susceptible to manipulation or trading abuses or result in violations of law.
Status: Marginal
Data Source: Exchange certification filings and agency memoranda.
Verification: Filings and Actions automated database tracks and calculates processing time from receipt date through to date of designation or registration.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
82% 86% 73% 29% 75%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

29%

Performance Analysis & Review

The percentage of trading rule amendment certification reviews completed within three months of receipt by the Commission decreased over last year. This decrease in performance is due to the fact that DMO did not have sufficient staff to keep up with the influx of submissions and added responsibilities resulting from the Farm Bill and the rulemakings mandated by the Dodd-Frank Act, in spite of the support this year of several temporary interns.

For much of FY 2010, the Division was understaffed relative to the volume of reviews it is required to accomplish. At times completion of certain rule amendment reviews—for example those applicable to contracts with very low trading volume or changes to trading rules that did not seem to make a large change—were delayed to allow staff to focus on more important matters, such as rule changes that might create risk to the markets. It is unlikely, given the submission of complex contracts and multifaceted trading rule submissions, and in light of the additional review responsibilities included in the Farm Bill and the rulemakings mandated by Dodd-Frank Act, that performance will improve in the absence of increased staffing.

Performance Highlights

Commission staff completed reviews of 49 substantive product rule amendments and 259 substantive trading rule amendments.

 

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