The New York Mercantile Exchange and the Commodity Exchange should consider adopting a formal review process to confirm that market participants are using approved strategies when relying on an exemption from an exchange-granted position limit, said Commodity Futures Trading staff in a rule review of the two exchange’s compliance with certain of the core responsibilities of designated contract markets. In general, staff of the CFTC’s Division of Market Oversight concluded that NYMEX and COMEX maintained an adequate surveillance program for routine surveillance of market trading and expiring contracts; had adequate surveillance tools and staffing; and that the exchanges’ investigative work was “thorough and complete.” The CFTC did not review the exchanges’ handling of exchange for related position transactions as part of its review, but indicated that a separate review on EFRPs was currently underway. DSIO staff indicated that the exchanges’ use of warning letters to resolve certain violations was “appropriate.” In those instances, the exchanges’ market surveillance (MS) staff had concluded that the relevant cases “typically involved simple administrative or clerical errors and very low overages, which MS determined did not disrupt the market or unduly impact settlements of contracts.”
My View: I recently reported on a rule review by the CFTC’s DMO of the CBOE Futures Exchange, LLC. (Click here to access the article, “CFTC’s Division of Market Oversight Highlights Compliance Department Resources Concern in CBOE Futures Rule Enforcement Review” in the July 10, 2016 edition of Bridging the Week.) One recommendation made by staff was that the CBOE Futures Regulation Department “should recommend and the Exchange should promptly take appropriate disciplinary action when it makes a finding that a violation of a substantive trading rule occurred.” This may sound innocuous. However, the recommendation was made in response to the issuance of warning letters by CFE to certain trading permit holders in response to their alleged placement of fictitious orders and trades. According to CFTC staff, “[w]hile a warning letter may be appropriate for certain violations of recordkeeping or audit trail rules, the Division believes that issuing a warning letter for a substantive trading violation is never appropriate.” As I have written previously, this statement appears contrary to the plain language of CFTC Rule 38.711 (click here to access) that does not limit the types of violations for which warning letters may be issued. All this provision does is limit to one time the number of occasions an exchange may issue a warning letter for any type of rule violation during a rolling one-year period. If, based on its own assessment of facts and circumstances, an exchange believes that the appropriate disciplinary action in response to a rule violation is to issue a warning letter, the CFTC should defer to the exchange’s discretion absent extraordinary circumstances. It is encouraging that CFTC staff may have backed away from its harsh and seeming misinterpretation of the relevant CFTC rule in DMO’s NYMEX and COMEX rule review.