CME Group announced amendments to its rule related to Globex order entry that will affirmatively require all persons that enter orders electronically into Globex (“terminal operators”) to ensure that all mandatory audit trail fields are input accurately in the first instance. Currently, such obligation applies only to some specifically enumerated fields. However, as currently is the case, clearing members that authorize such persons’ access to Globex would be “responsible for the Globex terminal operator’s compliance with this rule” even when such operator is a third-party client. This potentially would make clearing members responsible for the accurate input of all CME Group-required audit trail field information by all their non-affiliated direct access clients, as opposed to some of the information as currently is the case. (Click here to access current CME Group Rule 536.B.1.) CME Group’s revised rule is scheduled to be effective May 31.
Compliance Weeds and My View: Unfortunately, seemingly innocuous amendments to a CME Group rule – 536.B.1 – could impose a Damoclean sword of almost impossible burdens and increased potential liability over clearing members for direct access clients they authorize. This does not appear to be the intent of the CME Group, but it appears to be a consequence.
Currently, under CME Group Rule 536.B.2, entities certified to access Globex directly must create “an audit trail” of each “message” (e.g., an order) entered into the electronic matching system. (Click here to access the elements of this audit trail.) Clearing members that authorize such access “are responsible for “maintaining or causing to be maintained” the electronic audit trail for such systems for five years, although they may delegate such responsibility to clients that are also clearing members or equity member firms. (Click here to access CME Group Rule 536.B.2.)
Rule 536.B.2 goes on to explain that “Each such electronic audit trail must be complete and accurate for every electronic communication such system receives or generates,” and the audit trail must contain all required audit trail fields. However, Rule 536.B.1 solely requires Globex terminal operators to enter accurately in the first instance only certain, but not all mandatory audit trail fields.
CME Group’s rule amendments reflect a desire to harmonize Rules 536.B.1 and 536.B.2 to make clear that it expects terminal operators to enter all required audit trail information accurately in the first instance. This way, when the audit trail information is retained by a direct access client or its clearing member, the information should be correct and meaningful when it is reviewed at a later time for regulatory or other reasons. Conceptually, this makes sense.
However, because of the way the rule is currently constructed and proposed to be amended, clearing members would potentially guarantee such accuracy when they have no effective means to ensure such correctness. This makes no sense.
The version of Rule 536.B.1 in effect today already imposes a virtually impossible responsibility on clearing members– although CME Group has not applied the rule to date in an unreasonable fashion. The amendments to the rule, however, make a problematic rule worse – although there is no reason to expect anything but a continued reasonable approach by CME Group itself in applying the rule.
Notwithstanding, CME Group should make clear that they do not expect clearing members to guarantee the accuracy of all data in all mandatory audit trail fields entered by terminal operators for which they grant direct access. They could do this by amending Rule 536.B.1 or by clarifying its view in a Market Regulation Advisory Notice – perhaps by cross referencing another CME Group rule – Rule 574. Pursuant to this provision, a clearing member might be held liable for a violation of an exchange's rules by a direct access client it authorizes, but solely if it “has actual or constructive knowledge of [the] violation ...and the clearing member fails to take appropriate action.” (Click here to access CME Group Rule 574 – see last paragraph. Click here to access CME Group MRAN RA1520-5, a logical MRAN to amend). This provision, at least, establishes a standard that can be practically applied.