[Federal Register Volume 62, Number 93 (Wednesday, May 14, 1997)]
[Notices]
[Pages 26480-26482]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-12533]


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COMMODITY FUTURES TRADING COMMISSION


Comex Division of the New York Mercantile Exchange Petition for 
Exemption From the Dual Trading Prohibition in Affected Contract 
Markets

AGENCY: Commodity Futures Trading Commission.

ACTION: Order.

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SUMMARY: The Commodity Futures Trading Commission (``Commission'') is 
granting the petition of the Comex Division of the New York Mercantile 
Exchange (``Comex`` or ``Exchange'') for exemption from the prohibition 
against dual trading in its gold and silver futures contracts.

DATES: This Order is effective May 6, 1997.

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

SUPPLEMENTARY INFORMATION: On October 21, 1993, the Commodity Exchange, 
Inc., now the Comex Division (``Comex'' or ``Exchange'') of the New 
York Mercantile Exchange, submitted a Petition for Exemption from the 
Dual Trading Prohibition for its gold and silver futures contracts. 
Subsequently, the Exchange submitted a corrected petition, a 
supplement, and an update on November 30, 1993, January 5, 1994, and 
January 17, 1997, respectively. Upon consideration of these petitions 
and other matters of record, including staff review of Exchange audit 
trail test results to Commission-specified tests, compliance with the 
order ticket customer identification requirement of Commission 
Regulation 1.35, dual trading surveillance data required under the 
Commission's August 12, 1996 Audit Trail Report, and disciplinary and 
investigatory actions undertaken by the Exchange between January 1995 
and December 1996, the Commission hereby finds that Comex meets the 
standards for granting a dual trading exemption contained in section 
4j(a) of the Commodity Exchange Act (``Act'') as interpreted in 
Commission Regulation 155.5.\1\
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    \1\ The record consists of the information, views, and arguments 
presented in writing in the Comex Division's petition and its 
attachments, supplements and update thereto, and other relevant 
information identified by the Commission, which includes the audit 
trail test conducted by the Exchange in June 1996 and reviewed by 
the Commission in November 1996, the audit trail re-test conducted 
by the Commission in December, 1996, and documents submitted by the 
Exchange as part of a rule enforcement review of the Exchange 
initiated by the Commission in January 1997.
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    Subject to Comex's continuing ability to demonstrate that it meets 
applicable requirements, the Commission specifically finds that Comex 
maintains a trade monitoring system which is capable of detecting and 
deterring, and is used on a regular basis to detect and to deter, all 
types of violations attributable to dual trading and, to the full 
extent feasible, all other violations involving the making of trades 
and execution of customer orders, as required by section 5a(b) and 
Commission Regulation 155.5. The Commission further finds that Comex's 
trade monitoring system includes audit trail and recordkeeping systems 
that satisfy the Act and regulations.\2\
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    \2\ Sections 4j(a)(3) and 5a(b) of the Commodity Exchange Act 
and Commission Regulations 155.5 and 1.35, 17 CFR 1.35, 155.5(d). 
Section 4j(a)(3) requires the Commission to exempt a contract market 
from the prohibition against dual trading, either unconditionally or 
on stated conditions, upon finding that the trade monitoring system 
in place at the contract market satisfies the requirements of 
section 5a(b), governing audit trails and trade monitoring systems, 
with regard to violations attributable to dual trading at such 
contract market. Commission Regulation 155.5 requires a contract 
market to demonstrate that its trade monitoring system is capable of 
and is used to detect and to deter dual trading abuses and to 
demonstrate that it meets each element required of the components of 
such a system.

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[[Page 26481]]

    With respect to each required component of the trade monitoring 
system, the Commission finds as follows:

(a) Physical Observation of Trading Areas

    Comex's trade monitoring system satisfies the requirement of 
section 5a(b)(1)(A) in that Comex maintains and executes an adequate 
program for physical observation of Exchange trading areas and 
integrates the information obtained from such observation into its 
compliance programs. The Exchange physically observes trading areas by 
conducting daily floor surveillance during the open, close, and at 
random times during each trading day. Comex also performs floor 
surveillance when warranted by special market conditions, such as 
exceptional volatility or contract expirations. The Exchange uses 
information obtained from such surveillance in evaluating audit trail 
data and otherwise in executing its compliance programs.

(b) Audit Trail System

    The Exchange's trade monitoring system satisfies the audit trail 
standards of section 5a(b)(1) in that it is capable of capturing 
essential data on the terms, participants, and sequence of 
transactions. The system obtains relevant data on unmatched trades and 
outtrades to the level of precision, accuracy, and frequency required 
by sections 5a(b)(2) and (3) of the Act and Regulation 1.35. The 
Commission further finds that Comex accurately and promptly records the 
essential data on terms, participants, times (in increments of no more 
than one minute in length), and sequence through a means that is 
unalterable, continual, independent, reliable, and precise, as required 
by section 5a(b)(3) of the Act. Consistent with the guidelines to 
Regulation 155.5, the Commission finds that Comex also demonstrated the 
use of trade timing data in its surveillance systems for dual trading-
related and other abuses.

(1) One-Minute Execution Time Accuracy and Sequencing

    Comex's manual trade timing system captures a one-minute time for 
both the buy and sell sides of every trade and sequences all customer 
and proprietary trades. In two audit trail tests, conducted by the 
Exchange in January 1996 and by the Commission in October 1996, the 
accuracy and sequencing rates of Comex's trade times exceeded 90 
percent. Separately, the Exchange provided the Commission with four 
months of 1996 data demonstrating that 90 percent or more of trade 
times in gold and silver futures were consistent with time and sales 
data during this time period.

(2) Unalterable, Continual, Independent, Reliable, and Precise Times

    The Commission finds that trade records generated by Comex, 
including order tickets and trading cards, are recorded in nonerasable 
ink and that alterations are completely recorded. Trade data are, to 
the extent practicable, absent enhanced electronic means, provided 
continually to the Exchange at no more than hourly intervals. Trading 
card collections occur within 15 minutes after each half-hour time 
bracket, and members must submit trade data by one-half hour after each 
one-half hour trading period.
    Trade times are independently obtained through a reliable means, to 
the extent practicable, since individual times separately submitted for 
each side of a trade can be compared to each other, to underlying trade 
data, and to time and sales. Comex's trade timing system also produces 
precise sequencing.

(3) Broker Receipt Time

    The Commission finds that it is not practicable at this time for 
Comex to record the time each order is received by a floor broker for 
execution at Comex. Immediately executable flashed orders, however, are 
in substantial compliance with the objectives of section 5a(b)(3)(B), 
as stated previously by the Commission in its Order on flashed orders 
and broker receipt times.\3\
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    \3\ 60 FR 58049 (Nov. 24, 1995).
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(c) Recordkeeping System

    Comex satisfies the requirements of section 5a(b)(1)(B) by 
maintaining an adequate recordkeeping system that is able to capture 
essential data on the terms, participants, and sequence of 
transactions. The Exchange uses such information and information on 
violations of such requirements on a consistent basis to bring 
appropriate disciplinary actions.
    Comex conducts monthly trading card and quarterly order ticket 
reviews for a representative sample of customer orders and uses 
information from these reviews to generate investigations.
    Comex's trade register contains account numbers that identify 
customers. The Commission's review of a sample of order ticket account 
identifiers demonstrated in excess of 90 percent compliance with the 
requirement that the account identification relate back to the ultimate 
customer account.

(d) Surveillance Systems and Disciplinary Actions

    As required by section 5a(b)(1) (C), (D) and (F), Comex uses 
information generated by its trade monitoring and audit trail systems 
on a consistent basis to bring appropriate disciplinary action for 
violations relating to the making of trades and execution of customer 
orders. In addition, Comex assesses meaningful penalties against 
violators and refers appropriate cases to the Commission.
    On a daily basis, Comex reviews trade registers and computerized 
surveillance reports to detect dual trading-related and other trading 
abuses. All relevant trade data, including account numbers, are 
included in these reviews. The Exchange reviews its trade register for 
one randomly selected day each week and surveillance exception reports 
on a daily basis. The exception reports are designed to identify such 
suspicious trading activity as trading ahead, trading against, 
preferential trading (withholding or disclosing orders), accommodation 
trading, prearranged trading, improper cross trading, and money-passing 
schemes.\4\
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    \4\ For example, Comex's trading ahead review on a recent date 
identified .004 percent of trades in all futures contracts for 
further review.
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    From 1995 to 1996, the Exchange initiated 111 investigations into 
all types of possible abuses. Based on examination of its computerized 
surveillance reports, Comex initiated 28 dual trading-related 
investigations in 1996. Twenty-one such investigations were closed in 
1996. In 1996, Comex assessed $75,500 in fines and suspended members 
for 244 days in five dual trading-related cases involving six members.

(e) Commitment of Resources

    The Commission finds that Comex meets the requirements of section 
5a(b)(1)(E) by committing sufficient resources for its trade monitoring 
system to be effective in detecting and deterring violations and by 
maintaining an adequate staff to investigate and to prosecute 
disciplinary actions. For fiscal year 1996, Comex and Nymex committed 
29 personnel to trade practice and audit surveillance and reported its 
compliance budget in

[[Page 26482]]

accordance with consistent standards across exchanges as $11,507,951.
    Accordingly, on this date, the Commission HEREBY GRANTS Comex's 
Petition for Exemption from the dual trading prohibition for trading in 
its gold and silver futures contracts.
    For this exemption to remain in effect, Comex must demonstrate on a 
continuing basis that it meets the relevant statutory and regulatory 
requirements. The Commission will monitor continued compliance through 
its rule enforcement review program and based on any other information 
it may obtain about Comex's program. With respect to this continuing 
obligation, Comex needs to ensure that it fully integrates floor 
surveillance into its compliance program and takes appropriate 
disciplinary actions. Although the Commission has found that Comex 
meets the standards of independence and continued provision of data to 
the extent practicable and has found that it is not practicable at this 
time to capture a broker receipt time, the Commission reserves the 
ability to reconsider what is practicable as technology for order 
routing becomes more widely available.
    The provisions of this Opinion and Order shall be effective on the 
date on which it is issued and shall remain in effect unless and until 
it is revoked in accordance with section 8e(b)(3)(B) of the Commodity 
Exchange Act, 7 U.S.C. 12e(b)(3)(B). If other Comex contracts become 
affected contracts after the date of this Order, the Commission may 
expand this Order in response to an updated petition that includes 
those contracts.
    It is so ordered.

    Dated: May 6, 1997.

    By the Commission.
Jean A. Webb,
Secretary to the Commission.
[FR Doc. 97-12533 Filed 5-13-97; 8:45 am]
BILLING CODE 6351-01-M