CFTC DMO RULE ENFORCEMENT REVIEWS ISSUED FOR CBOT, COMEX, CME, NYME

FROM:  U.S.COMMODITY FUTURES TRADING COMMISSION 
November 24, 2014

CFTC DMO Issues Rule Enforcement Reviews of the Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc. and New York Mercantile Exchange, Inc.

Washington, DC — The U.S. Commodity Futures Trading Commission’s Division of Market Oversight (Division) today issued three separate rule enforcement reviews of certain Designated Contract Markets (DCMs).

The Division’s reviews assessed compliance with Commodity Exchange Act Core Principles for DCMs and related regulations with respect to: (1) the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) audit trail program; (2) the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX) trade practice surveillance program; and (3) the CBOT, CME, COMEX, and NYMEX (collectively, the Exchanges) disciplinary program.

Overall, the Division found the Exchanges’ respective programs to be generally in compliance with the assessed DCM core principles and Commission regulations. However, the Division’s reviews identified certain deficiencies – areas where an exchange is not in compliance with a Commission regulation and must take corrective action, and recommendations – areas where an exchange should improve its compliance program. The deficiencies and recommendations identified in the reviews are summarized below.

CBOT and CME Audit Trail Program

Deficiencies:

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must ensure that their program for reviewing front-end audit trail data is effective and the reviews are conducted in a timely manner.

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must develop a program to at least annually review and enforce the assignment process of user IDs to automated trading models, algorithms, programs, and system in order to enforce the CBOT and CME’s user ID (Tag 50) policy.

• As required by Commission regulation § 38.553(b), CBOT and CME must ensure that the minimum summary fine amount for electronic trading audit trail deficiencies on each exchange is “meaningful” and “sufficient to deter recidivist behavior.” This minimum summary fine amount should be published in the Exchanges’ rules.

NYMEX and COMEX Trade Practice Surveillance Program

Deficiency:

• As required by Commission regulation § 38.158(b), NYMEX and COMEX must complete investigations in one year or less, absent mitigating circumstances.

Recommendations:

• NYMEX and COMEX should implement a system which would enable Market Regulation staff to efficiently track connections between related trade practice matters (complaints, research files, and cases) and thereby identify the source of time delays.

• NYMEX and COMEX should continue to develop strategies to detect spoofing.

• NYMEX and COMEX should reduce the time they take to complete pre-investigative trade practice matters (research files and complaints).

CBOT, CME, COMEX, and NYMEX Disciplinary Program

Deficiency:

• As required by Commission regulation § 38.701, the Exchanges must maintain sufficient enforcement staff to promptly prosecute possible rule violations.

Recommendation:

• The Exchanges should take appropriate measures to ensure that internal deliberations do not interfere with the prompt resolution of disciplinary matters.

Copies of the reports are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21st Street N.W., Washington, DC 20581, 202-418-5080, or by accessing the Commission’s website at www.cftc.gov.

Last Updated: November 24, 2014

CFTC CLOSES SILVER CONTRACT MARKET MANIPULATION CASE

FROM:  COMMODITY FUTURES TRADING COMMISSION
CFTC Closes Investigation Concerning the Silver Markets

Washington, DC – The Commodity Futures Trading Commission (CFTC or Commission) Division of Enforcement has closed the investigation that was publicly confirmed in September 2008 concerning silver markets. The Division of Enforcement is not recommending charges to the Commission in that investigation. For law enforcement and confidentiality reasons, the CFTC only rarely comments publicly on whether it has opened or closed any particular investigation. Nonetheless, given that this particular investigation was confirmed in September 2008, the CFTC deemed it appropriate to inform the public that the investigation is no longer ongoing. Based upon the law and evidence as they exist at this time, there is not a viable basis to bring an enforcement action with respect to any firm or its employees related to our investigation of silver markets.

In September 2008 the CFTC confirmed that its Division of Enforcement was investigating complaints of misconduct in the silver market (see CFTC Release 5562-08, October 2, 2008). At that time the Commission had received complaints regarding silver prices. These complaints were focused on whether the silver futures contracts traded on the Commodity Exchange, Inc. (COMEX) were being manipulated.1 For example, the complaints pointed to differences between prices in the silver futures contracts and prices in other silver products, including retail silver products. The complainants generally asserted that because the prices for retail silver products, such as coins and bullion, had increased, the price of silver futures contracts should have also experienced an increase. By reference to publicly available information concerning large traders with short open positions in the silver futures contracts, the complaints also alleged that the large shorts in the silver market were responsible for lower futures prices. The Division of Enforcement conducted an exhaustive investigation of these and other complaints and focused on identifying and evaluating whether there was any trading activity in violation of the Commodity Exchange Act and Commission regulations including the anti-manipulation provisions.

The Division of Enforcement’s investigation utilized more than seven thousand enforcement staff hours. The staff reviewed and analyzed position and transaction data, including physical, swaps, options, and futures trading data, and other documents and information, and interviewed witnesses. The Division’s investigation included an evaluation of silver market fundamentals and trading within and between cash, futures and over the counter markets. The investigation was also undertaken with assistance by the Commission’s Division of Market Oversight, the Commission’s Office of Chief Economist, and outside experts.

Separately, the Division of Market Oversight continued surveillance of the silver market contemporaneously to the Division of Enforcement’s investigation. The Division of Market Oversight’s market surveillance function encompasses a robust monitoring of traders’ positions and transactions at the ownership and account levels to identify potential violations of the Commodity Exchange Act and Commission regulations including, but not limited to, price manipulation, disruptive trading and trade practice violations. For example, after an episode of sharp price moves in any commodity, staff utilizes numerous visualization and analytical tools on data submitted daily to the Commission to discover indications of potential manipulation and other violations. Where questions remain, Division of Market Oversight staff regularly utilize the Commission authority such as the Special Call under Regulation § 18.05 to obtain additional detailed information from traders.

The Division of Enforcement takes complaints it receives seriously. The Division will not hesitate to use its authority, including new manipulation authority in the Dodd-Frank Act, to bring market manipulation charges as supported by the evidence.

If you have information about a violation of the Commodity Exchange Act or Commission regulations, you may either file a tip or complaint under our whistleblower program, or report such violations or other suspicious activities or transactions to our Division of Enforcement. The CFTC will pay awards to eligible whistleblowers who voluntarily provide us with original information about violations of the Commodity Exchange Act that lead us to bring an enforcement action that results in more than $1 million in monetary sanctions.

1 The CME Group now includes the New York Mercantile Exchange (NYMEX) as well as the Commodity Exchange, Inc. (COMEX).  Market participants generally still refer to the silver futures contracts offered by the CME Group as “COMEX silver futures.”