Washington--The Commodity Futures Trading Commission's (Commission) Division of Trading and Markets (Division) has completed a "horizontal" rule enforcement review of the programs in place at U.S. futures exchanges for monitoring corrections made to their respective time and sales record (T&S). The T&S is a primary audit trail document used in trade reconstructions.

The Division found that some similarities exist among exchanges in the methods they use to approve quote change requests, however, each exchange generally follows its own protocols. At virtually all of the exchanges quote change requests are disclosed to the pit for possible objection and must be approved by a member of a pit or floor committee, who operates pursuant to exchange conflict of interest rules or procedures.

Based on its review of all of the exchanges' procedures, the Division found four areas where it believes a "best practice" approach would benefit the integrity of the quote change processes at all exchanges and made recommendations accordingly. Among other things, the Division recommended that all exchanges implement rules that: (1) set forth a reasonable time frame during trading, within which a quote change request can be presented for approval; (2) prohibit "as-of" quote changes, absent an exchange demonstrating a compelling reason for retaining such a procedure; (3) require that quote change requests made 15 minutes or more after the subject trade took place be approved by at least two pit or floor committee members; and (4) require the approval of two pit or floor committee members for changes to quotes which may affect a daily high or low price or an opening or closing range.

The Division also found that most exchange surveillance programs only review quote changes if they are the subject of a customer or member complaint, or if a questionable quote change is identified in the course of other routine surveillance activities. In this regard, the Division recommended that all exchanges integrate into their routine surveillance programs a periodic review of a sample of quote changes to determine compliance with relevant exchange rules and procedures, the legitimacy of the changes, and the adequacy of the required documentation.

The report sets forth these and other specific recommendations for improvement. The Division has requested that each of the exchanges respond to those recommendations within 60 days.

A copy of the report is available upon request through the Commission's Office of Public Affairs, Three Lafayette Centre, 1155 21st Street, N.W., Washington, D.C. 20581, (202) 418-5080.