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Outcome Objective 3.2

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Outcome Objective 3.2: Commodity futures and option markets are effectively self-regulated.

Performance Measure 3.2.1



Performance Measure 3.2.1: Percentage of intermediaries who meet risk-based capital requirements.
Status: Effective
Data Source: Agency database of financial information from 1-FR-FCM and FOCUS reports, and related regulatory notices.
Verification: Review and analysis of exchanges’ daily trading data and FCMs’ financial filings in SPARK and 1-FR data systems.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Performance Analysis & Review

Performance target was met for FY 2010. The CEA, Commission regulations, and SRO rules require FCMs to comply with minimum financial requirements and related reporting requirements at all times. Included in the minimum financial requirements is the Commission’s and SROs’ risk-based capital requirement. Any FCM failing to meet the risk-based capital requirement must provide immediate notice to the Commission and to the firm’s designated SRO. Furthermore, Commission regulations provide that any FCM that fails to meet minimum capital requirements, including the risk-based capital requirement, and cannot timely come back into compliance with these requirements must transfer all customer accounts and immediately cease operating as an FCM until it can demonstrate compliance.

The Commission and SROs monitor FCMs’ compliance with the risk-based capital requirement through review of monthly financial reports, regulatory notices, and the conduct of in-field examinations. DCIO also uses the SPARK system, combined with required financial warning notices and market monitoring, to closely monitor the financial condition of FCMs.

Performance Highlights

DCIO staff reviewed all regulatory notices received from FCMs during FY 2010. This review included assessing each firm’s actions to ensure that all firms that reported a failure to maintain the minimum capital requirement either took the necessary steps to bring themselves back into compliance or properly transferred their customers’ accounts to other, adequately capitalized FCMs. DCIO staff reviewed financial reports submitted by every registered FCM on a monthly basis to assess compliance with the minimum financial requirements. DCIO staff also reviewed audited annual financial reports for every FCM during FY 2010. Finally, DCIO staff conducted examinations of several FCMs during FY 2010 to assess the firms’ compliance with Commission and SRO capital requirements.

Performance Measures 3.2.2



Performance Measure 3.2.2: Percentage of self-regulatory organizations that comply with requirement to enforce their rules.
Status: Effective
Data Source: Documentation from DCMs/SROs under review, agency reports and files, and financial surveillance materials.
Verification: Review and analysis of systems, data, procedures, policies, practices, and manuals, including on-site visits.
ACTUAL
FY 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Clearing and Intermediary Oversight

FY 2010 Performance Results

100%

Division of Market Oversight

Performance Analysis & Review

Division of Clearing and Intermediary Oversight: Performance target was met for FY 2010. 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 assesses the SROs’ compliance with applicable core principles, Commission regulations, and staff interpretations. DCIO also reviews the programs of registered futures associations for compliance with Section 17 of the CEA. 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 reviews 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 rule enforcement reviews (RERs) of DCMs on a regular cycle to ensure that exchanges enforce their rules. CEA Core Principle 2 specifically requires that exchanges monitor and enforce compliance with their rules. DMO reviews exchange compliance with CEA Core Principle 2 when it conducts an RER of an exchange’s trade practice surveillance program. RERs also examine the adequacy of an exchange’s market surveillance, audit trail, disciplinary, and dispute resolution programs. When DMO examines these programs, its review includes an analysis to ensure that an exchange is enforcing its rules that relate to the particular program under review.

In FY 2010, DMO assessed the compliance of ICE Futures U.S. with core principles relating to audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. Although DMO did not find that any specific program failed to comply with applicable core principles, DMO made several recommendations for improvement.

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

Performance Highlights

Division of Clearing and Intermediary Oversight: DCIO substantially completed a review of an SRO’s financial surveillance programs that focused on the SRO’s oversight of member FCMs compliance with the CFTC, and SRO minimum financial and related reporting requirements. Staff will present its findings on the review to the Commission in early FY 2011. DCIO also completed a review of an SRO’s registration program during FY 2010. DCIO determined that the SRO’s registration program was in compliance with applicable provisions of the CEA and Commission regulations. DCIO is in the process of conducting two other reviews of SRO’s oversight programs that will be completed during FY 2011.

Division of Market Oversight: DMO found in its RER report for ICE Futures U.S. that although the size of Compliance staff needed to be increased, the existing staff was very experienced and that investigations were thorough and well documented. In addition, investigations were expanded to include additional trading dates and subjects where appropriate. DMO recommended that ICE Futures implement the following to improve its self-regulatory programs: 1) ensure that open outcry saturation recordkeeping reviews are conducted annually; 2) re-examine its trading card compliance program and make adjustments to achieve a higher percentage of compliance, and ensure that the Compliance Department uses its enhanced authority with respect to issuing meaningful summary fines; 3) augment its audit trail compliance program to include a programmatic review of electronic audit and recordkeeping rules; 4) take appropriate measures to complete investigations in a timely manner; and 5) record the date on which completed investigative reports are approved by senior Compliance staff. With respect to CME and CBT, DMO found in its RER that the Exchanges’ have experienced compliance staff and sophisticated automated surveillance systems. However, DMO did make recommendations for improvement in its RER of CME and CBT. Specifically, DMO recommended that the Exchanges: 1) conduct a comprehensive review of their compliance staff to make sure that staff size is sufficient to perform compliances services; 2) take ongoing steps as necessary to ensure that compliance staff is increased as necessary; 3) review their summary fine schedule for audit trail violations to ensure that fines are sufficient to deter recordkeeping violations; and 4) ensure proper documentation for disciplinary committee minutes.

 

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