[Federal Register: May 14, 1997 (Volume 62, Number 93)]
[Notices]
[Page 26480-26482]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr14my97-68]
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COMMODITY FUTURES TRADING COMMISSION
Comex Division of the New York Mercantile Exchange Petition for
Exemption From the Dual Trading Prohibition in Affected Contract
Markets
AGENCY: Commodity Futures Trading Commission.
ACTION: Order.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is
granting the petition of the Comex Division of the New York Mercantile
Exchange (``Comex`` or ``Exchange'') for exemption from the prohibition
against dual trading in its gold and silver futures contracts.
DATES: This Order is effective May 6, 1997.
FOR FURTHER INFORMATION CONTACT:
Duane C. Andersen, Special Counsel, Division of Trading and Markets,
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st
St., NW., Washington, DC 20581; telephone (202) 418-5490.
SUPPLEMENTARY INFORMATION: On October 21, 1993, the Commodity Exchange,
Inc., now the Comex Division (``Comex'' or ``Exchange'') of the New
York Mercantile Exchange, submitted a Petition for Exemption from the
Dual Trading Prohibition for its gold and silver futures contracts.
Subsequently, the Exchange submitted a corrected petition, a
supplement, and an update on November 30, 1993, January 5, 1994, and
January 17, 1997, respectively. Upon consideration of these petitions
and other matters of record, including staff review of Exchange audit
trail test results to Commission-specified tests, compliance with the
order ticket customer identification requirement of Commission
Regulation 1.35, dual trading surveillance data required under the
Commission's August 12, 1996 Audit Trail Report, and disciplinary and
investigatory actions undertaken by the Exchange between January 1995
and December 1996, the Commission hereby finds that Comex meets the
standards for granting a dual trading exemption contained in section
4j(a) of the Commodity Exchange Act (``Act'') as interpreted in
Commission Regulation 155.5.\1\
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\1\ The record consists of the information, views, and arguments
presented in writing in the Comex Division's petition and its
attachments, supplements and update thereto, and other relevant
information identified by the Commission, which includes the audit
trail test conducted by the Exchange in June 1996 and reviewed by
the Commission in November 1996, the audit trail re-test conducted
by the Commission in December, 1996, and documents submitted by the
Exchange as part of a rule enforcement review of the Exchange
initiated by the Commission in January 1997.
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Subject to Comex's continuing ability to demonstrate that it meets
applicable requirements, the Commission specifically finds that Comex
maintains a trade monitoring system which is capable of detecting and
deterring, and is used on a regular basis to detect and to deter, all
types of violations attributable to dual trading and, to the full
extent feasible, all other violations involving the making of trades
and execution of customer orders, as required by section 5a(b) and
Commission Regulation 155.5. The Commission further finds that Comex's
trade monitoring system includes audit trail and recordkeeping systems
that satisfy the Act and regulations.\2\
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\2\ Sections 4j(a)(3) and 5a(b) of the Commodity Exchange Act
and Commission Regulations 155.5 and 1.35, 17 CFR 1.35, 155.5(d).
Section 4j(a)(3) requires the Commission to exempt a contract market
from the prohibition against dual trading, either unconditionally or
on stated conditions, upon finding that the trade monitoring system
in place at the contract market satisfies the requirements of
section 5a(b), governing audit trails and trade monitoring systems,
with regard to violations attributable to dual trading at such
contract market. Commission Regulation 155.5 requires a contract
market to demonstrate that its trade monitoring system is capable of
and is used to detect and to deter dual trading abuses and to
demonstrate that it meets each element required of the components of
such a system.
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[[Page 26481]]
With respect to each required component of the trade monitoring
system, the Commission finds as follows:
(a) Physical Observation of Trading Areas
Comex's trade monitoring system satisfies the requirement of
section 5a(b)(1)(A) in that Comex maintains and executes an adequate
program for physical observation of Exchange trading areas and
integrates the information obtained from such observation into its
compliance programs. The Exchange physically observes trading areas by
conducting daily floor surveillance during the open, close, and at
random times during each trading day. Comex also performs floor
surveillance when warranted by special market conditions, such as
exceptional volatility or contract expirations. The Exchange uses
information obtained from such surveillance in evaluating audit trail
data and otherwise in executing its compliance programs.
(b) Audit Trail System
The Exchange's trade monitoring system satisfies the audit trail
standards of section 5a(b)(1) in that it is capable of capturing
essential data on the terms, participants, and sequence of
transactions. The system obtains relevant data on unmatched trades and
outtrades to the level of precision, accuracy, and frequency required
by sections 5a(b)(2) and (3) of the Act and Regulation 1.35. The
Commission further finds that Comex accurately and promptly records the
essential data on terms, participants, times (in increments of no more
than one minute in length), and sequence through a means that is
unalterable, continual, independent, reliable, and precise, as required
by section 5a(b)(3) of the Act. Consistent with the guidelines to
Regulation 155.5, the Commission finds that Comex also demonstrated the
use of trade timing data in its surveillance systems for dual trading-
related and other abuses.
(1) One-Minute Execution Time Accuracy and Sequencing
Comex's manual trade timing system captures a one-minute time for
both the buy and sell sides of every trade and sequences all customer
and proprietary trades. In two audit trail tests, conducted by the
Exchange in January 1996 and by the Commission in October 1996, the
accuracy and sequencing rates of Comex's trade times exceeded 90
percent. Separately, the Exchange provided the Commission with four
months of 1996 data demonstrating that 90 percent or more of trade
times in gold and silver futures were consistent with time and sales
data during this time period.
(2) Unalterable, Continual, Independent, Reliable, and Precise Times
The Commission finds that trade records generated by Comex,
including order tickets and trading cards, are recorded in nonerasable
ink and that alterations are completely recorded. Trade data are, to
the extent practicable, absent enhanced electronic means, provided
continually to the Exchange at no more than hourly intervals. Trading
card collections occur within 15 minutes after each half-hour time
bracket, and members must submit trade data by one-half hour after each
one-half hour trading period.
Trade times are independently obtained through a reliable means, to
the extent practicable, since individual times separately submitted for
each side of a trade can be compared to each other, to underlying trade
data, and to time and sales. Comex's trade timing system also produces
precise sequencing.
(3) Broker Receipt Time
The Commission finds that it is not practicable at this time for
Comex to record the time each order is received by a floor broker for
execution at Comex. Immediately executable flashed orders, however, are
in substantial compliance with the objectives of section 5a(b)(3)(B),
as stated previously by the Commission in its Order on flashed orders
and broker receipt times.\3\
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\3\ 60 FR 58049 (Nov. 24, 1995).
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(c) Recordkeeping System
Comex satisfies the requirements of section 5a(b)(1)(B) by
maintaining an adequate recordkeeping system that is able to capture
essential data on the terms, participants, and sequence of
transactions. The Exchange uses such information and information on
violations of such requirements on a consistent basis to bring
appropriate disciplinary actions.
Comex conducts monthly trading card and quarterly order ticket
reviews for a representative sample of customer orders and uses
information from these reviews to generate investigations.
Comex's trade register contains account numbers that identify
customers. The Commission's review of a sample of order ticket account
identifiers demonstrated in excess of 90 percent compliance with the
requirement that the account identification relate back to the ultimate
customer account.
(d) Surveillance Systems and Disciplinary Actions
As required by section 5a(b)(1) (C), (D) and (F), Comex uses
information generated by its trade monitoring and audit trail systems
on a consistent basis to bring appropriate disciplinary action for
violations relating to the making of trades and execution of customer
orders. In addition, Comex assesses meaningful penalties against
violators and refers appropriate cases to the Commission.
On a daily basis, Comex reviews trade registers and computerized
surveillance reports to detect dual trading-related and other trading
abuses. All relevant trade data, including account numbers, are
included in these reviews. The Exchange reviews its trade register for
one randomly selected day each week and surveillance exception reports
on a daily basis. The exception reports are designed to identify such
suspicious trading activity as trading ahead, trading against,
preferential trading (withholding or disclosing orders), accommodation
trading, prearranged trading, improper cross trading, and money-passing
schemes.\4\
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\4\ For example, Comex's trading ahead review on a recent date
identified .004 percent of trades in all futures contracts for
further review.
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From 1995 to 1996, the Exchange initiated 111 investigations into
all types of possible abuses. Based on examination of its computerized
surveillance reports, Comex initiated 28 dual trading-related
investigations in 1996. Twenty-one such investigations were closed in
1996. In 1996, Comex assessed $75,500 in fines and suspended members
for 244 days in five dual trading-related cases involving six members.
(e) Commitment of Resources
The Commission finds that Comex meets the requirements of section
5a(b)(1)(E) by committing sufficient resources for its trade monitoring
system to be effective in detecting and deterring violations and by
maintaining an adequate staff to investigate and to prosecute
disciplinary actions. For fiscal year 1996, Comex and Nymex committed
29 personnel to trade practice and audit surveillance and reported its
compliance budget in
[[Page 26482]]
accordance with consistent standards across exchanges as $11,507,951.
Accordingly, on this date, the Commission HEREBY GRANTS Comex's
Petition for Exemption from the dual trading prohibition for trading in
its gold and silver futures contracts.
For this exemption to remain in effect, Comex must demonstrate on a
continuing basis that it meets the relevant statutory and regulatory
requirements. The Commission will monitor continued compliance through
its rule enforcement review program and based on any other information
it may obtain about Comex's program. With respect to this continuing
obligation, Comex needs to ensure that it fully integrates floor
surveillance into its compliance program and takes appropriate
disciplinary actions. Although the Commission has found that Comex
meets the standards of independence and continued provision of data to
the extent practicable and has found that it is not practicable at this
time to capture a broker receipt time, the Commission reserves the
ability to reconsider what is practicable as technology for order
routing becomes more widely available.
The provisions of this Opinion and Order shall be effective on the
date on which it is issued and shall remain in effect unless and until
it is revoked in accordance with section 8e(b)(3)(B) of the Commodity
Exchange Act, 7 U.S.C. 12e(b)(3)(B). If other Comex contracts become
affected contracts after the date of this Order, the Commission may
expand this Order in response to an updated petition that includes
those contracts.
It is so ordered.
Dated: May 6, 1997.
By the Commission.
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 97-12533 Filed 5-13-97; 8:45 am]
BILLING CODE 6351-01-M
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