The inspector general (IG) of the Commodity Futures Trading Commission (CFTC) has initiated an independent inquiry of the agency’s market surveillance operations, according to a semi-annual report forwarded to Congress.
The report by CFTC IG A. Roy Lavik indicated that the probe would deal specifically with the “informal communications between agency staff and traders with large open positions approaching expiration,” and “is motivated by concerns voiced by agency staff as well as the United States Government Accountability Office (GAO).”
In a 2007 report, the GAO expressed concern with the “apparent absence” of documentation of certain communications by CFTC market surveillance staff when checking into the large open market positions of traders (see NGI, Oct. 22, 2007).
In cases where a trader provided a “reasonable explanation” for a large trading position and a “reasonable delivery or liquidation strategy,” staff said that “no further action would be required,” and typically no formal record would be made of the inquiry, according to the CFTC report.
“Without such data, CFTC’s measures of the effectiveness of its actions to combat fraud and manipulation in the markets will not reflect this surveillance activity, and CFTC management might miss opportunities to both identify trends in activities or markets and better target its limited resources,” it said.
“We intend to take an independent look at CFTC market surveillance communications and documentation. We are interested in finding out more about how the process works, whether current internal procedures exist and are followed by staff, and whether increased documentation would improved operations and increase transparency, without resulting in undue burden taking into account current staffing levels. We are also interested in the legal ramifications of the creation of a database of market surveillance,” the report noted.
The CFTC’s IG Office “will make recommendations as appropriate.”
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