The Commodity Futures Trading Commission’s Division of Market Oversight (DMO) has issued the results of a rule enforcement review of the Chicago Mercantile Exchange and Chicago Board of Trade for the period beginning November 1, 2010 and ending October 31, 2011. The rule enforcement review recommended certain changes to the exchanges’ hedge exemption procedures and exchange for related position (EFRP) surveillance program. DMO recommended that the exchanges (1) refrain from granting retroactive hedge exemptions if a participant does not file a timely application; (2) consider untimely hedge exemption applications to be speculative limit violations; (3) refer egregious conduct, such as continuing to increase positions after notification of a speculative limit violation, to enforcement; (4) ensure that hedge exemption applications are complete, accurate and have designated the appropriate hedging categories; and (5) refrain from granting hedge exemptions at levels above those requested by applicants.

DMO also recommended that the exchanges review the factors they use to select potentially problematic EFRPs and identified the following as factors that the exchanges currently consider in determining whether an EFRP warrants further review: (1) transactions where a participant rolls a position; (2) transactions involving participants that do not ordinarily engage in EFRPs; (3) transactions in which the price of the futures leg is not within the daily range for the relevant contract; (4) EFRPs tied to a spread transaction; and (5) EFRPs in unusual products or for unusual volumes. DMO also recommended that the exchanges establish an adequate and robust program to ensure that market participants and clearing firms maintain documents related to EFRP transactions and to review a sufficiently large, strategically selected sample of EFRPs to ensure that they are bona fide EFRP transactions.

The Rule Enforcement Review of the Chicago Mercantile Exchange and Chicago Board of Trade is available here.