[Federal Register Volume 61, Number 162 (Tuesday, August 20, 1996)]
[Rules and Regulations]
[Pages 42999-43002]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-21103]
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 1
Correction of Trading Records
AGENCY: Commodity Futures Trading Commission.
ACTION: Final rule.
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SUMMARY: The Commodity Futures Trading Commission (``Commission'') has
amended Commission regulations, which address the preparation,
submission and correction of trading cards, to make its provisions
applicable to all trading records. The Commission also has amended
regulations, which require the use of non-erasable ink and addresses
correction of errors, to require that the correction of erroneous
information on trading records will be accomplished in such a manner
that the originally recorded information must not be obliterated or
otherwise made illegible. The Commission has further amended the
regulations to require that a ply of the trading card, or in the
absence of plies the original trading card, that subsequently is
rewritten to correct erroneous information must be submitted to
contract market personnel or the clearing member in accordance with
contract market rules which set forth the required collection schedule
for trading cards. Contract markets are required to promulgate rules to
that effect.
EFFECTIVE DATE: October 21, 1996.
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
Regulation 1.35(d)(7), which became effective on May 7, 1990,1
requires that trading cards prepared by members of contract markets
must be completed in non-erasable ink and submitted in accordance with
contract market rules adopted pursuant to Regulation 1.35(j)(1).2
It also provides, in paragraph (d)(7)(ii), that a member of a contract
market may correct any errors by crossing out erroneous information or
rewriting the trading card. Regulation 1.35(d)(7) was one of various
rule amendments adopted by the Commission that were intended, among
other things, to limit the opportunity for the fabrication or
alteration of trading records, to ensure accountability for trading
cards and to enhance exchange audit trails and trade surveillance.
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\1\ 55 FR 8127 (March 7, 1990).
\2\ Regulation 1.35(j)(1) requires that each contract market
maintain in effect rules which require, among other things, that
trading records prepared by a member of the contract market 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.
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Notwithstanding these provisions, the Commission has found, based
upon its oversight activities, instances in which it appears that trade
prices and quantities have been altered on trading records in order to
accomplish abuse of customer orders. The Commission believes that this
type of activity may be accomplished under the guise of correcting
erroneous information on a trading record if the information originally
recorded is obscured. Such treatment of trading records renders it more
difficult for the Commission and the exchanges to detect potentially
fraudulent activity. Further, correcting erroneous information by
obliteration of the original data can facilitate illegal purposes and
increases the difficulty of determining how to correctly reconstruct
and surveill trade activity.
The Commission believes that obscuring trade information originally
recorded not only can be used to facilitate illegal or fraudulent
conduct, but also is in itself illegal. Obscuring the information
originally recorded violates the Regulation 1.35 requirement that
members prepare accurate and complete trading records. The requirement
to record trades in non-erasable ink, found in Regulations 1.35
(d)(7)(ii) and (j)(8), was implemented, in part, to prevent the
obliteration of trade data through erasures. The paragraph (d)(7)(ii)
requirement that members be fully accountable for trading cards that
are rewritten in order to correct errors exists to assure that the
originally recorded data are maintained. As the Commission
[[Page 43000]]
has stated with regard to the requirement that members be accountable
for their trading cards, ``[b]ased on Regulations 1.35(d)(6) and
(j)(6), the Commission and the contract markets should be assured that
trading cards which may assist in determining whether improper activity
has occurred are available.'' 3
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\3\ 55 FR 8127, 8135 (March 7, 1990).
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On June 6, 1996 the Commission published for public comment in the
Federal Register proposed amendments to Regulation 1.35(d)(7) 4 to
expressly address the issue by specifically prescribing the method by
which a member of a contract market may correct errors on trading
records.
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\4\ 61 FR 28806 (June 6, 1996).
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II. Comments Received
The Commission received four comment letters on the proposed
amendments, all from contract markets.5 Two of the commenters
supported, and one raised no objection to, the regulatory goals of the
proposal but were opposed to the proposal's requirement that a specific
method be used, i.e., crossing out erroneous information with no more
than a single line through each character. One commenter believed that
the amendment was unnecessary and provided no additional benefits to
the exchange. This commenter further stated that original trade
information that is erroneous and subsequently changed such that the
original information is illegible is contrary to the provisions of the
current Regulation 1.35(d)(7). The Commission has carefully reviewed
and considered the comments received and, as a result, has modified and
clarified the proposed amendments as appropriate.
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\5\ Comment letters were received from the Chicago Mercantile
Exchange (``CME''), New York Mercantile Exchange (``NYMEX''),
Coffee, Sugar & Cocoa Exchange, Inc. (``CSCE'') and Kansas City
Board of Trade (``KCBT'').
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III. Amendments to Regulation 1.35(d)(7)
The final amendments would make paragraph (d)(7), which addresses,
among other things, the preparation of trading cards, applicable to all
trading records. The final amendments would modify paragraph
(d)(7)(ii), to require that the correction of erroneous information on
trading records must be accomplished in such a manner that the
originally recorded information would not be obliterated or otherwise
made illegible. The final amendments also would modify paragraph
(d)(7)(ii) to require that a ply of the trading card, or in the absence
of plies the original trading card, that subsequently is rewritten to
correct erroneous information must be submitted to contract market
personnel or the clearing member in accordance with contract market
rules which set forth the required collection schedule for trading
cards.
A. Proposed Paragraph (d)(7)
1. The Proposed Amendments
The proposed amendments would have made the provisions of paragraph
(d)(7) applicable to all trading records, not just trading cards. Thus,
the error correction provisions of paragraph (d)(7)(ii) would be
applicable to all trading records, thereby assuring that all trading
records are subject to the same error correction standards currently in
existence with regard to trading cards.6 Further, contract markets
would be required to maintain in effect rules that would require errors
on other trading records to be corrected in the manner prescribed by
paragraph (d)(7)(ii).7
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\6\ With regard to trading cards only, the member would still
have been able to correct erroneous information by rewriting the
trading card. Pursuant to paragraph (d)(6), the member would have
remained accountable for any trading card that was subsequently
rewritten.
\7\ Regulation 1.35(j)(8) requires that each contract market
maintain in effect rules which require that members complete trades
in non-erasable ink in the manner prescribed by paragraph
(d)(7)(ii).
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The other trading records to which this provision would have
applied included order tickets or other written records prepared under
Regulation 1.35(a-1) (2), (3) or (4), as well as order tickets received
on the floor through electronic order routing systems, and trading
records prepared for ``flashed'' orders.
2. Comments Received
In its comment letter, the CSCE stated that it had no objection to
the proposal to amend Regulation 1.35(d)(7) to make the error
correction procedure applicable to all trading records. The other
commenters did not specifically address this issue.
3. Regulation 1.35(d)(7)
Accordingly, the Commission has determined to make the proposed
amendment final as written, applying the provisions of paragraph (d)(7)
to all trading records, including order tickets or other written
records prepared under Regulation 1.35(a-1) (2), (3) or (4), order
tickets received on the floor through electronic order routing systems,
and trading records prepared for ``flashed'' orders.
B. Proposed Paragraph (d)(7)(ii)
1. The Proposed Amendments
The proposed amendments to paragraph (d)(7)(ii) would have required
that erroneous information crossed out on a trading record would have
to 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. Thus, the erroneous information
being crossed out would not be obliterated and an audit would reveal
the original information recorded on the trading record, as well as any
information subsequently recorded.
2. Comments Received
Although all commenters recognized the need to maintain the
integrity of the originally recorded information, they were opposed to
the specificity of the amendment's proposed requirement that the
erroneous information be crossed out with no more than a single line
through each character. The CME commented that the requirement to cross
out erroneous information with a single line will prove counter-
productive and could conceivably result in greater outtrade percentages
with potentially significant economic impact. Further, the CME stated
that the CME and other contract markets are in the best position to
determine what constitutes ``obliteration'' and are best able to police
such activity. In its comment, NYMEX stated that the requirement of a
``single line'' deletion is unnecessary and that the Commission's goal
would be furthered simply by requiring that erroneous information not
be obliterated or otherwise made illegible so that exchanges would
retain the flexibility to determine the most effective means for
determining compliance. The CSCE commented that the single line
requirement overreaches in achieving the objective of preventing the
creation of fictitious trading records and recommended that the
Commission permit the correction of trade record errors as is usual and
customary for a particular member provided the original trade
information is not obscured or rendered illegible. The KCBT commented
that it was highly unlikely that the single line would always be
recognized as erroneous information by clerks entering trade
information for clearing, thus resulting in an outtrade.
3. Regulation 1.35(d)(7)(ii)
After reviewing the comments, the Commission is persuaded that the
method by which the erroneous information is corrected need not be
[[Page 43001]]
specified by Commission regulation so long as the regulatory objective,
the legibility of the originally recorded information, is met. The
Commission is aware that this objective can be attained by more than
one method. Accordingly, the amendment has been modified to delete the
single line requirement and to state that a member may correct any
errors by crossing out erroneous information without obliterating or
otherwise making illegible any of the originally recorded information.
The method by which this objective is identified to exchange membership
and enforced by each exchange may be determined by exchange rules.
The Commission also has decided to amend paragraph (d)(7)(ii) to
add the requirement that a ply of the trading card, or in the absence
of plies the original trading card, that subsequently is rewritten to
correct erroneous information also must be submitted to contract market
personnel or the clearing member in accordance with contract market
rules which set forth the required collection schedule for trading
cards.8 As stated previously, the Commission should be assured
that trading cards which may assist in determining whether improper
activity has occurred are available. Accordingly, the Commission is
requiring that a ply of the rewritten trading card, or in the absence
of plies the original trading card, be collected. The collection of
such rewritten cards would occur in accordance with the schedule for
collection of trading cards in place under exchange rules which were
implemented pursuant to Commission Regulation 1.35(j)(1).9
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\8\ As previously noted, trading cards prepared by members must
be submitted in accordance with contract market rules adopted
pursuant to Regulation 1.35(j)(1). The Commission believes that all
exchanges currently use multi-ply trading cards. At least one ply,
where practicable the top ply completed in non-erasable ink, must be
submitted to contract market personnel or the clearing member
pursuant to Regulation 1.35(j)(1). Where the top ply is not
submitted to contract market personnel or the clearing member, it
must be retained pursuant to Regulation 1.31 by the member as a
record required by Regulation 1.35(a).
\9\ The Commission recognizes that this creates an exception to
the Regulation 1.35(j)(1) provision that contract market rules need
not require that those original source documents which cannot be
relied upon by the contract market or clearing member for clearing
purposes be submitted.
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Regulation 1.35(d)(7)(ii) states, in current and amended form, that
the member is accountable pursuant to paragraph (d)(6) for any card
that subsequently is rewritten. With regard to contract markets on
which the member's trading cards ordinarily are retained by his
clearing member, the Commission has previously stated, in the context
of the responsibility for a rewritten trading card, that the clearing
member would be responsible for those trading cards not used for trade
submission.10 With regard to contract markets on which the member
retains his own trading cards, a member who has a clerk rewrite his
trades on a new trading card because of an error now will have to
submit a ply of the rewritten trading card, or in the absence of plies
the original trading card, to the contract market.11 Thus, either
the clearing member or the contract market will have a ply of the
rewritten trading card, collected from the member within 15 minutes
after the 30-minute trading interval, available to assist in any
investigation conducted to determine whether improper activity has
occurred.
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\10\ 54 FR 37117, 37122 (September 7, 1989). In these
circumstances, the dual requirement to submit a ply of the rewritten
trading card, or the original trading card, and remain accountable
for the card could be met in two ways. First, if the top ply, or the
original card, completed in non-erasable ink, is submitted to and
retained by the clearing member, the collection requirement is met
and, further, the clearing member assumes accountability for the
rewritten card. Second, if the member keeps the top ply and submits
a copy to the clearing member, the collection requirement is met and
the member remains accountable for the card and must retain the top
ply.
\11\ On those exchanges where the trading cards are multi-ply
and are collected by the exchange rather than a clearing member,
whether the member retains the top ply written in ink or a copy
would be determined by contract market rules but the member would,
nonetheless, be accountable for the rewritten trading card.
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IV. Related 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 to evaluate within the context of a particular rule proposal
whether all or some contract market members should be considered
``small entities'' for purposes of the RFA and, if so, to analyze the
economic impact on contract market members of any such rule at that
time. 47 FR 18618, 18620 (April 30, 1982).
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.
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 final amendment, as
designed, would not impose a significant economic impact on such
members.
B. Paperwork Reduction Act
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 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.
Copies of the Office of Management and Budget approved information
collection package associated with this rule may be obtained from Jeff
Hill, Office of Management and Budget, Room 3228, NEOB, Washington, DC
20503, (202) 395-7340.
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 4,
4g, 5, 5a, and 8a, 7 U.S.C. 6, 6g, 7, 7a, and 12a, 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. 1a, 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, unless otherwise noted.
2. Section 1.35(d)(7) is revised 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 by
[[Page 43002]]
crossing out erroneous information without obliterating or otherwise
making illegible any of the originally recorded information. With
regard to trading cards only, a member may correct erroneous
information by rewriting the trading card; provided, however, that the
member must submit a ply of the trading card, or in the absence of
plies the original trading card, that is subsequently rewritten in
accordance with contract market rules which set forth the required
collection schedule for trading cards and provided further that the
member is accountable for any trading card that subsequently is
rewritten pursuant to paragraph (d)(6) of this section.
* * * * *
Issued in Washington, DC on August 13, 1996 by the Commission.
Catherine D. Dixon,
Assistant to the Secretary of the Commission.
[FR Doc. 96-21103 Filed 8-19-96; 8:45 am]
BILLING CODE 6351-01-P