CFTC Releases Rule Enforcement Review of Kansas City Board of Trade

WASHINGTON- The Commodity Futures Trading Commission (Commission) has notified the Kansas City Board of Trade (KCBT) of the results of a rule enforcement review completed by the Commission’s Division of Trading and Markets (T&M). The purpose of the review was to evaluate KCBT’s market surveillance, audit trail, trade practice surveillance, and disciplinary programs. The target period for the review was January 1 through December 31, 1999.

T&M found that KCBT maintains an adequate market surveillance program. Staff monitors daily, among other things, price changes, spreads, volume, open interest, deliverable supplies, and clearing member positions. In addition, KCBT routinely contacts trade sources and large market participants to keep informed of cash market activities and delivery intentions.

With respect to audit trail, T&M found that members have a high level of compliance with one-minute trade timing, and order ticket and trading card recordkeeping requirements. T&M also found that KCBT’s practice of treating certain execution times that are inconsistent with the Price Change Register as reporting, rather than trade timing errors, results in diminished enforcement of its trade timing rule. Therefore, T&M recommends that KCBT treat these errors as timing errors subject to KCBT’s summary disciplinary program.

In addition, T&M found that KCBT maintains an adequate trade practice surveillance program. Investigations are generally thorough and completed in a timely manner. T&M identified several investigation reports, however, that did not contain a clear explanation of staff’s rationale for closing the investigation. Accordingly, T&M recommends that KCBT ensure that when staff concludes an investigation and determines that no basis exists for finding a rule violation, the respective investigation report include a complete and clear explanation of staff’s reasoning for such a determination.

Lastly, T&M found that the lone sanction imposed during the target period for a substantive trading violation was insufficient to deter future violations. The case involved two members who were levied small fines for executing a noncompetitive trade. T&M recommends that KCBT impose penalties for substantive trading violations of an amount that is significant enough to address the seriousness of the violation and to serve as an effective deterrent.

KCBT will have 60 days to respond in writing to T&M’s recommendations. Copies of the report are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21^st Street N.W., Washington, DC 20581, (202) 418-5080, or by accessing the Commission’s website at http://www.cftc.gov/tm/tmkcbtrer091800.htm