For Release: March 6, 2008
CFTC Releases Rule Enforcement Reviews of Three Exchanges
Washington, DC—The Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight (Division) has completed rule enforcement reviews of the Chicago Climate Futures Exchange (CCFE), HedgeStreet Exchange (HedgeStreet), and U.S. Futures Exchange (USFE). The results of the three reviews were published jointly in a single report that evaluates the exchanges’ compliance with core principles relating to their market surveillance, audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. Since the National Futures Association (NFA) is contractually responsible for performing regulatory services on behalf of the three exchanges, the review also examined NFA’s relevant programs. The review covered the period of April 1, 2005 to December 31, 2006.
The Division found that CCFE, HedgeStreet, and USFE maintain adequate market surveillance, audit trail, and trade practice surveillance programs. However, one HedgeStreet investigation which revealed that two members had pre-arranged trades to pass money, raises concerns. HedgeStreet responded to the matter by sending administrative reminder letters to the two members. The Division believes that the reminder letters were inadequate sanctions and recommends that HedgeStreet submit substantive trade practice violations for formal disciplinary proceedings, and that it sanction substantive violations in a meaningful manner.
The Division also found that CCFE, HedgeStreet, and USFE have appropriate dispute resolution and disciplinary rules and procedures. Because there were no arbitrations at any of the exchanges during the target period, the Division has no basis upon which to evaluate the adequacy of the exchanges’ dispute resolution programs. Neither HedgeStreet nor CCFE brought any disciplinary cases during the target period. Accordingly, the Division has no basis upon which to evaluate the adequacy of these exchanges’ disciplinary programs.
USFE levied monetary sanctions in three disciplinary cases during the target period. The sanctions levied in all three cases were adequate. However, in two of the cases, both of which involved an USFE incentive program, the Division found that USFE’s Disciplinary Committee may not have fully understood what constitutes wash trading, as defined by the CFTC, and the relevant factors to be considered. In addition, the minutes for both cases failed to demonstrate that the Disciplinary Committee deliberated all of the alleged rule violations. Finally, in one of the two cases, USFE believed that its rules limited its ability to exercise jurisdiction over traders who were independent contractors of USFE members, rather than employees of members. Accordingly, the Division recommends that USFE: 1) ensure that its Disciplinary Committee understands what constitutes wash trading, as defined by the CFTC, and the relevant factors to be considered; 2) ensure that Disciplinary Committee minutes demonstrate that the Committee deliberated all alleged rule violations against all alleged parties; and 3) amend its rulebook so that it may exercise jurisdiction over persons associated with members, regardless of whether they are employees or independent contractors.
R. David Gary
Last Updated: March 6, 2008