MARKET SURVEILLANCE PERSONNEL
The Exchange’s Vice-President/Chief Economist joined the CSCE in 1996. He oversees the Market Surveillance and Research Departments of the New York Board of Trade. In doing so, he supervises the MSD staff and all market surveillance-related activities at the CSCE, and reports potential problems to the President and the various Control Committees.
The Market Surveillance Manager has been with the Exchange for 11 years and reports directly to the Vice President/Chief Economist. She conducts daily analyses of trading by individuals and groups, focusing on price movements, relationships, open interest, volume, deliveries, physical supplies, and other factors. She also monitors expiring contracts by contacting member firms for position data, delivery intentions and other factors. In addition, she relays position data and market information to the Chief Economist, President and Control Committees, and monitors positions to ensure compliance with speculative position and hedge exemption limits. Finally, she refers potential violations to the Compliance Department for investigation.
The Market Surveillance Manager oversees the Exchange’s large trader reporting system, reviews exemption applications and makes recommendations with respect to those applications, participates in Control Committee meetings, and acts as liaison for market surveillance with CFTC staff.
The Senior Market Surveillance Clerk has been with the Exchange for 13 years. He spends all of his time on MSD matters and reports to the Market Surveillance Manager. His activities include collecting and entering position data into the large trader reporting system, preparing weekly options reports, collecting and compiling data from large trader reports, logging daily position reports, issuing and compiling requests for CFTC Forms 102, and maintaining records of overdue forms and reports. He also aggregates accounts and helps prepare documents for Control Committee meetings.
The Against Actuals analyst, who has been with the Exchange for 11 years, joined the MSD in July 1998, when the MSD assumed responsibility for reviewing such transactions.
LARGE TRADER REPORTING SYSTEM (SLIMS)
Futures ’01 reports are generally received by 10:00 a.m. on each business day for the close of the previous day’s business. The MSD will telephone any person who submitted an ’01 report the previous day but fails to submit one by 11:00 a.m.
The MSD requires that a completed Form 102 be filed no more than five business days after a trader becomes reportable. If the reportable position is large, the MSD will contact the responsible person by telephone or other expedited means before the fifth business day to obtain the information that will appear on the Form 102.
In late 1998, 41 of 42 clearing members submitted futures ’01 data via computer-to-computer transmission. This accounts for approximately 80 percent of reportable futures open interest. Futures ’01 data submitted in hard copy is keypunched into SLIMS daily. Options data is submitted and reviewed daily but keypunched into SLIMS weekly on Wednesday for positions as of the close of business each Tuesday. In early 1999, more than 90 percent of options ’01 data was submitted by computer-to-computer transmission.
When an account becomes reportable for the first time, SLIMS will display the message, “Account Does Not Exist – Create Dummy Account.” The system automatically assigns a code, a series of four question marks followed by a four-digit number, to each such account. The code identifies the account until the MSD receives CFTC Form 102. MSD staff records each coded account on a Dummy Account Listing with all of the pertinent account information, including clearing member name, dummy account code, and date of the ’01 report. Requests for CFTC Form 102 are sent to the clearing members carrying each of these dummy accounts and the responses are due five days after the account becomes reportable.
When the MSD receives a CFTC Form 102, it enters the following information into SLIMS: trader’s name, address, phone number, trade designations (commercial or speculative, customer or house), and the name and telephone number of a contact person at the FCM carrying the account. The MSD then assigns a “short name” to each account, an eight-character abbreviation of the full name, that is used to locate account records. The MSD may also assign an aggregate name, which is used to identify accounts that are associated or under common control and must be aggregated for speculative limit purposes.
Approximately biweekly, the MSD generates and reviews two reports to verify that omnibus accounts are reporting reportable positions. If a review of the “Omnibus Driver/Passenger Report” suggests that any omnibus account may be carrying reportable accounts that it has not reported to the Exchange, the MSD will contact the omnibus account. If the MSD identifies a reportable account, it sends a letter to the omnibus account stating that reportable positions must be reported to the Exchange.
DISCIPLINARY COMMITTEE STRUCTURE AND PROCEDURES
The Exchange has three disciplinary committees: The BCC, the Floor Committee,1 and the Appeals Committee.2 The BCC consists of two subcommittees of substantially equal size, BCC I and BCC II. For a given investigation report prepared by Compliance, one subcommittee reviews the report and makes a determination as to whether or not the rule violation alleged in the investigation report may have occurred and also a determination regarding whether or not settlement offer(s) should be extended to the subject member(s).3
When a subcommittee concludes that a rule violation may have occurred, the subcommittee shall advise the member of that fact and may take one of the following actions:
(1) return the matter to Compliance with instructions for further action;4
(2) refer the matter to a formal hearing;5
(3) enter into or approve a settlement agreement reached between the member and Compliance which may provide for a penalty which differs from that agreed to by the parties;6 or
(4) negotiate and enter into a written settlement agreement with the member whereby the member, with or without admitting guilt, may agree to a penalty, including a fine of up to $10,000 for each rule violation.7
If a BCC subcommittee concludes that a rule violation may have occurred, the BCC generally will offer an opportunity to enter into a settlement agreement. The subject member or member firm has ten days to respond to an offer of settlement by the BCC, and may decide to take advantage of an opportunity available under Exchange rules to present evidence on this matter.8 Such a presentation is conducted informally, with no transcript taken.9
After presentation of evidence by the member, which occurs at the next meeting of that subcommittee, the subcommittee takes another vote. If it is again determined that a rule violation may have occurred, the subcommittee generally will propose another settlement to the subject member or member firm.10 If a settlement cannot be obtained at this point, a notice of charges is issued.11 The respondent is entitled to serve a written answer to the notice of charges and to submit a written request for a hearing on the charges within ten days of the date of service of the notice of charges.12 If no answer is served within ten days, all the charges shall be deemed to be admitted.13
If a particular case could not be resolved by settlement and an evidentiary hearing was necessary, a hearing would be conducted before a Hearing Panel, selected by the BCC Chairman from members of the other subcommittee.14 Though the Chairman of the BCC has sole discretion in determining the number of members to be selected for the Hearing Panel,15 Exchange staff indicated that a Hearing Panel usually consists of three members.16 Prior to commencement of a hearing, the Hearing Panel could approve entry into a settlement agreement with the respondent, whereby the member, without admitting or denying guilt, may agree to a penalty, including a fine of up to $100,000 for each rule violation.17
In the event a hearing is held, the burden of proof is on Compliance, and any finding of guilt would be based on the weight of the evidence contained in the record of the hearing.18 A respondent could appeal a decision of the Hearing Panel by serving on the Exchange, and filing with the Chairman of the Appeals Committee, a written notice of appeal within ten days after a copy of the written decision has been served on the member.19
In its discretion, the Appeals Panel of the Appeals Committee may affirm, reverse or modify the decision of the Hearing Panel, in whole or in part, provided that unless a new formal hearing is granted, no finding of fact made by the Hearing Panel may be set aside if supported by any evidence in the record.20 The Appeals Committee shall issue a written decision and serve a copy on the Exchange and on the respondent.21
Finally, Commission Regulations 1.63 and 1.64 require self-regulatory organizations to maintain rules with respect to service on governing boards and disciplinary committees by persons with disciplinary histories, and the composition of such boards and committees. In conducting this review, Division staff determined that the Exchange was in compliance with regulations for disciplinary committees as well as for governing boards.22
1 The Floor Committee has authority over floor offenses such as bidding through offers and decorum and attire violations.
2 The Appeals Committee must be composed of at least three members of the Board of Directors. CSCE Committee Rule 2.02.
3 The Compliance investigation reports are presented alternately to the two subcommittees. For example, in January, investigation reports might be presented to BCC I for initial case review and settlement. Any adjudications resulting from those cases would be heard by a panel comprised of members from BCC II. In February, investigation reports would then be presented to BCC II, and any adjudications resulting from those cases would be heard by a panel comprised of members from BCC I.
4 Disciplinary Rule 26.02(e)(i).
5 Disciplinary Rule 26.02(e)(iii).
6 Disciplinary Rules 26.01(e), 26,02(e)(ii). Subject to the approval of the BCC, Compliance is authorized to negotiate and enter into settlement agreements including fines of up to $10,000 for each rule violation alleged.
7 Disciplinary Rule 26.02(e)(iv).
8 Disciplinary Rule 26.02(d).
10 Transcript, page 199.
11 Disciplinary Rule 26.05.
12 Disciplinary Rule 26.06.
14 Disciplinary Rule 26.08.
16 Transcript, page 199.
17 Disciplinary Rule 26.08(c).
18 Disciplinary Rule 26.11(i).
19 Disciplinary Rule 26.16(a).
20 Disciplinary Rule 26.22(a).
21 Disciplinary Rule 26.22(b).
22 The CSCE rule corresponding to Commission Regulation 1.63 is Exchange Rule 20.05. CSCE rules corresponding to Commission Regulation 1.64 are Exchange Rule 26.02(c) (for the BCC) and Exchange Rule 26.16 (for the Appeals Committee).