Follow Us:

Outcome Objective 3.3

Table of Contents >

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 2007
ACTUAL
FY 2008
ACTUAL
FY 2009
ACTUAL
FY 2010
PLAN
FY 2010
100% 100% 100% 100% 100%

Lead Program Office

Division of Market Oversight

FY 2010 Performance Results

100%

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 2010, DMO completed RERs of ICE Futures U.S., CME, and CBT. 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 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 to ensure that compliance staff is increased; 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.

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 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 requirements.

DCIO staff conducts periodic, routine examinations of the financial and sales practice programs of the SROs for the purposes of reviewing the effectiveness of such programs and to assess whether SROs enforce DCM and Commission rules related to financial and related reporting requirements. DCIO’s examinations of SROs generally involve an assessment of some or all of the following areas: the level of staffing dedicated by SROs 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 SRO’s disciplinary program.

Staff also conducts reviews of all regulatory notices and monthly financial reports filed by FCMs with the Commission and with the SROs. Staff consults with the SROs regarding any material financial issues raised by the FCM filings. Such reviews and consultation provides staff with an opportunity to assess the effectiveness of the SROs oversight programs and their enforcement of DCM and Commission financial, compliance and related financial reporting requirements.

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 2010, DMO completed a rule enforcement review of ICE Futures U.S. The review assessed the Exchange’s compliance 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. DMO has not identified any material deficiencies at either exchange.

Performance Highlights

Division of Clearing and Intermediary Oversight: DCIO staff initiated a full-scope review of the financial and sales practice program of an SRO during FY 2010. The scope of the review encompasses the SRO’s staffing levels and its conduct of infield examinations, and review of financial statements and regulatory notices. Staff anticipates completing the review during FY 2011. Staff also reviewed all regulatory notices and financial reports filed by FCMs during FY 2010 for compliance with Commission regulations, and consulted with the appropriate SRO regarding any evidence of apparent violations of Commission or DCM financial regulations. Staff also conducted several direct examinations of FCMs during FY 2010 for the purpose of assessing the firms’ compliance with Commission and DCM regulations. Such reviews of the regulatory notices, financial filings, and direct examinations, provide an opportunity for staff to assess the effectiveness of SRO oversight programs and the extent to which SROs enforce their financial regulations.

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.

 

< Previous Page | Table of Contents | Next Page >