[Federal Register Volume 61, Number 110 (Thursday, June 6, 1996)]
[Proposed Rules]
[Pages 28806-28808]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-14129]



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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 1


Rule Amendment Concerning Trading Records

AGENCY: Commodity Futures Trading Commission.

ACTION: Proposed rule amendment.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'')

[[Page 28807]]

proposes to amend its Regulation to clarify a procedure specified for 
the correction of erroneous information on trading cards and to make 
that procedure applicable to other trading records. The amendment would 
specify that a member of a contract market who needs to correct an 
error on a trading record may do so only by crossing out the erroneous 
information with no more than a single line through each character, 
without obliterating or otherwise making illegible any of the 
originally recorded information. Contract markets would be required to 
maintain rules that require errors on trading records to be corrected 
in the prescribed manner.

DATES: Comments on the proposed amendment must be submitted on or 
before July 8, 1996.

ADDRESSES: Comments on the proposed amendment should be sent to: 
Commodity Futures Trading Commission, Three Lafayette Centre, 1155 21st 
Street, NW., Washington, DC 20581, Attention: Secretariat.

FOR FURTHER INFORMATION CONTACT: Duane C. Andresen, Special Counsel, 
Division of Trading and Markets, Commodity Futures Trading Commission, 
Three Lafayette Centre, 1155 21st Street, NW., Washington, DC 20581. 
Telephone: (202) 418-5490.

SUPPLEMENTARY INFORMATION:

I. Introduction

    On March 7, 1990 the Commission published in the Federal Register a 
number of final amendments to Regulation 1.35,1 which governs the 
records of cash commodity, futures, and options transactions which must 
be prepared and maintained for all purchases and sales of commodities 
for future delivery or commodity options on designated contract 
markets. These amendments were intended, among other things, to limit 
the opportunity for the fabrication or alteration of trading records 
and to enhance exchange audit trails and trade surveillance. The 
amendments imposed obligations directly on contract market members and 
required each contract market to promulgate implementing rules to that 
effect.
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    \1\ 55 FR 8127 (March 7, 1990).
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    Although many of the amendments' provisions were targeted to 
trading cards, other provisions were made specifically applicable to 
all trading records in order to limit the opportunity to alter or 
fabricate such trading records. The trading record collection 
requirement of Regulation 1.35(j)(1), designed to expeditiously 
transfer control of the documents from the executing members, is 
applicable to all trading records on which the contract market or 
clearing member relies as an original source document for clearing 
submission purposes.2 The requirement that trades be recorded in 
non-erasable ink, designed to provide added protection against improper 
alteration of trading records through erasures, is applicable to 
customer order tickets,3as well as trading cards.4
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    \2\ Regulation 1.35(j)(1) requires that each contract market 
maintain in effect rules which require, among other things, that 
trading records prepared pursuant to paragraphs (a-1) and (d) of 
this section be submitted to contract market personnel or the 
clearing member within 15 minutes of designated intervals not to 
exceed 30 minutes. Paragraph (a-1) requires the creation of order 
tickets; paragraph (d) requires the preparation of trading cards or 
other records showing purchases or sales executed on or subject to 
the rules of a contract market.
    \3\ Regulation 1.35(a-1) (2) and (4).
    \4\ Regulation 1.35(d)(7)(ii) and (j)(8). Regulation 1.35(j)(8) 
requires that each contract market maintain in effect rules which 
require that members complete trades in non-erasable ink as 
prescribed by paragraph (d)(7)(ii).
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    Notwithstanding these provisions, the Commission has found, based 
upon its oversight activities, instances in which it appears that 
members have altered or created fictitious trading records to 
facilitate illegal purposes. It appears that, in some instances, trade 
prices and quantities have been altered subsequent to trade execution 
to the detriment of customers and favorable trades for customers have 
been allocated to traders' personal accounts. The Commission believes 
that this type of activity may be facilitated by the manner in which 
traders, under the guise of correcting erroneous information on a 
trading record, obscure the information originally recorded. This 
practice, which has been observed to occur with respect to both trading 
cards and order tickets, also makes it more difficult to detect 
potentially fraudulent activity.
    The Commission believes that obscuring the trade information 
originally recorded can be used to facilitate or itself constitute 
illegal fraudulent conduct. As previously stated, the amendments to 
Regulation 1.35 were intended, among other things, to limit the 
opportunity for fabrication or alteration of trading records and to 
enhance exchange audit trails and trade surveillance. Correcting 
erroneous information by obliteration of the original data enhances the 
opportunity to facilitate illegal purposes and increases the difficulty 
involved in creating and maintaining adequate audit trail and trade 
practice surveillance programs. Nonetheless, in order to eliminate any 
ambiguity in this area, the Commission is now proposing to expressly 
address the issue by amending the method by which a member of a 
contract market may correct errors on a hard copy trading record.

II. Proposed Amendment

    In light of the foregoing, the Commission proposes to amend 
Regulation 1.35 in two respects. First, paragraph (d)(7), which 
addresses, among other things, the preparation of trading cards, would 
be made applicable to all trading records. Second, paragraph 
(d)(7)(ii), which requires the use of non-erasable ink and addresses 
correction of errors, would be modified to require that erroneous trade 
information be crossed out with no more than a single line through each 
character, without obliterating or otherwise making illegible any of 
the originally recorded information.

A. Proposed Paragraph (d)(7)

    The Commission proposes to amend paragraph (d)(7) to make it 
applicable to all trading records. In so doing, the Commission is 
making the error correction provisions of paragraph (d)(7)(ii) 
applicable to all trading records, not just trading cards. Thus, this 
amendment places other trading records under the same standards 
currently in existence with regard to the correction of errors on 
trading cards.5 Further, it requires contract markets to maintain 
in effect rules that require errors on other trading records to be 
corrected in the manner prescribed by paragraph (d)(7)(ii).
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    \5\ With regard to trading cards only, the member could still 
correct erroneous information by rewriting the trading card. 
Pursuant to paragraph (d)(6), the member would remain accountable 
for any trading card that is subsequently rewritten. The Commission 
requests comments regarding the continued advisability of this 
provision.
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    The other trading records to which this provision applies include 
order tickets prepared under Regulation 1.35(a-1), as well as order 
tickets received on the floor through electronic order routing systems 
and trading records prepared for ``flashed'' orders. It is the 
Commission's belief that preventing the obliteration of data is 
effectively a prophylactic requirement intended to prevent fraudulent 
alteration of trading records.

B. Proposed Paragraph (d)(7)(ii)

    The Commission proposes to amend paragraph (d)(7)(ii) to require 
that erroneous information crossed out on a trading record must be 
crossed out with no more than a single line through each character, 
without obliterating or otherwise making illegible any of the

[[Page 28808]]

originally recorded information. Thus, the erroneous information being 
crossed out would not be obliterated and an audit should reveal the 
original information recorded on the trading record, as well as any 
information subsequently recorded. Because the amendment to paragraph 
(d)(7) would make this provision applicable to all trading records, the 
Commission believes that this amendment would further limit the 
opportunity for the fabrication or alteration of trading records.
    The Commission believes that erroneous data normally should be 
crossed out using the same or a similar pen as is used by the member to 
record trade executions. In any event, the use of a felt pen or marker 
that obliterates the original recorded information, even if the 
information is crossed out with no more than a single line, would not 
be in compliance with this amended regulation. Overwriting erroneous 
information with corrected information, rather than crossing out the 
erroneous information in the prescribed manner, also would not be in 
compliance with this amended regulation.

III. Other Matters

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (``RFA''), 5 U.S.C. 601 et. seq., 
requires that agencies, in proposing rules, consider the impact of 
those rules on small businesses. The Commission has previously 
determined that contract markets are not ``small entities'' for 
purposes of the RFA, and that the Commission need not, therefore, 
consider the effect of proposed amendments on contract markets in 
relation to the RFA. 47 FR 18618, 18619 (April 30, 1982). The 
Commission has also determined that FCMs should be excluded from the 
definition of ``small entity'' based upon the fiduciary nature of the 
FCM/customer relationships as well as the fact that FCMs must meet 
minimum financial requirements. 47 FR 18618, 18619 (April 30, 1982).
    With respect to contract market members, the Commission has stated 
that it is appropriate to evaluate within the context of a particular 
rule proposal whether some or all members that would be affected by the 
rule should be considered small entities and, if so, to analyze the 
economic impact on such entities at that time. 47 FR 18618, 18620 
(April 30, 1982). The contract market members affected by the proposed 
amendment, other than clearing members, would be floor brokers and 
floor traders.
    The Commission recognizes that contract market members would be 
subject to the proposed amendments and that certain contract market 
members could be considered to be small entities for the purposes of 
the RFA. However, the Commission believes that the proposed amendment, 
as designed, would not impose a significant economic burden on members.
    Accordingly, the Acting Chairman, on behalf of the Commission, 
hereby certifies, pursuant to 5 U.S.C. 605(b), that the action taken 
herein will not have a significant economic impact on a substantial 
number of small entities.

B. Paperwork Reduction Act: Comment Request

    The Paperwork Reduction Act of 1980 (``ACT''), 44 U.S.C. 3501 et. 
seq., imposes certain requirements on federal agencies (including the 
Commission) in connection with their conducting or sponsoring any 
collection of information as defined by the Act. While this proposed 
rule has no burden, the group of rules (3038-0022) of which this is a 
part has the following burden:
    Average burden hours per response-3,546.
    Number of Respondents--15,286.
    Frequency of Response--On occasion.
    Persons wishing to comment on the information which would be 
required by this proposed/amended rule should contact Jeff Hill, Office 
of Management and Budget, Room 3228, NEOB, Washington, DC 20503, (202) 
395-7340. Copies of the information collection submission to OMB are 
available from Joe F. Mink, CFTC Clearance Officer, Three Lafayette 
Centre, 1155 21st Street NW., Washington, DC 20581, (202) 418-5170.

List of Subjects in 17 CFR Part 1

    Commodity futures, Commodity options, Contract markets, Customers, 
Members of contract markets, Noncompetitive trading, Reporting and 
recordkeeping requirements.

    In consideration of the foregoing, and pursuant to the authority 
contained in the Commodity Exchange Act and, in particular, Sections 5, 
5a, 5b, 6(a), 6b, 8a(7), 8a(9) and 8c, 7 U.S.C. 7, 7a, 7b, 8(a), 8b, 
12a(7), 12a(9), and 12c, the Commission hereby proposes to amend Part 1 
of Chapter I of Title 17 of the Code of Federal Regulations as follows:

PART 1--GENERAL REGULATIONS UNDER THE COMMODITY EXCHANGE ACT

    1. The authority citation for Part 1 continues to read as follows:

    Authority: 7 U.S.C. 2, 2a, 4, 4a, 6, 6a, 6b, 6c, 6d, 6e, 6f, 6g, 
6h, 6i, 6j, 6k, 6l, 6m, 6n, 6o, 6p, 7, 7a, 7b, 8, 9, 12, 12a, 12c, 
13a, 13a-1, 16, 16a, 19, 21, 23 and 24.

    2. Section 1.35 is proposed to be amended by revising paragraph 
(d)(7) to read as follows:


Sec. 1.35  Records of Cash Commodity, Futures, and Option Transactions.

* * * * *
    (d) * * *
    (7) Trading records prepared by a member of a contract market 
pursuant to contract market rules must:
    (i) Be submitted in accordance with contract market rules adopted 
pursuant to paragraph (j)(1) of this section; and
    (ii) Be completed in non-erasable ink. A member may correct any 
errors (A) by crossing out erroneous information with no more than a 
single line through each character, without obliterating or otherwise 
making illegible any of the originally recorded information or (B) with 
regard to trading cards only, by rewriting the trading card; provided, 
however, that the member is accountable pursuant to paragraph (d)(6) of 
this section for any trading card that is subsequently rewritten.
* * * * *
    Issued in Washington, DC on May 31, 1996 by the Commission.
Jean A. Webb,
Secretary of the Commission.
[FR Doc. 96-14129 Filed 6-05-96; 8:45 am]
BILLING CODE 6351-01-P