The Division of Market Oversight of the Commodity Futures Trading Commission found no deficiencies in a rule enforcement review of the enforcement programs of constituent exchanges of the CME Group and found the programs “generally adequate.”
However, staff made a number of recommendations, including that warning letters should not be issued in circumstances involving “misconduct “ similar to a few cases identified in the report that alleged wash trades, disruptive trading and spoofing. Although CME Group staff believed that warning letters were warranted based on the particular circumstances of each identified incident, CFTC staff argued that formal disciplinary action would have been more appropriate to serve “as a deterrent not only to the respondents, but also other market participants.”
CFTC staff also recommended that CME Group exchanges should (1) formally monitor for prohibited trading activity by persons who receive trading suspensions as part of their penalties or require futures commission merchants to review for such activity; (2) “document and explain” how it assesses a financial sanction when it notes that a respondent’s financial condition warrants a lesser financial penalty,” and (3) document why a business conduct committee rejects a settlement offer. CFTC staff suggested that documentation regarding rejected settlements would help promote consistency among different BCCs dealing with similar facts and circumstances.
No response of CME Group was published by the CFTC in connection with its rule enforcement review.
My View: The CFTC does not like exchange-issued warning letters. In its June 2016 rule enforcement review of the CBOE Futures Exchange, LLC, the Division of Market Oversight criticized the exchange for issuing warning letters when CFTC staff believed substantive violations of exchange rules had occurred. (Click here to access the relevant rule review.) 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.” However, under the applicable CFTC rule, exchanges have broad authority to issue warning letters subject to only one restriction: they may only issue a single warning letter to a person for any one type of violation during a one-year rolling period (click here to access CFTC Rule 38.711). There is no language limiting an exchange’s use of warning letters to only non-substantive offenses. Absent extraordinary circumstances, the CFTC should defer to an exchange’s application of its own judgment to assess how its rules are best administered. At a minimum, the CFTC should not effectively amend its own rules through rule enforcement reviews that are not subject to public comment.