[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