The New York Mercantile Exchange (Nymex) and the Commodity Exchange (Comex) maintained adequate audit trail, trade practice surveillance and disciplinary programs in 2009, but they need to hire more compliance staff, the Commodity Futures Trading Commission’s (CFTC) Division of Market Oversight said in a new report.

The two exchanges, which are owned and operated by CME Group, had a combined 133-member market regulation staff assigned to detect, investigate and prosecute potential illegal activities during the target period that the report covered: Jan. 1, 2009 through Dec. 31, 2009. The number of staff was largely unchanged since the division last conducted its enforcement review of the exchanges in 2004, even though trading volume had increased significantly, according to the CFTC report, which was released last Wednesday.

“Although market regulation plans to add two investigator positions in 2011 that will be assigned to Nymex, nearly the same number of Nymex-dedicated compliance staff are responsible for overseeing approximately a 131% increase in the volume of trading, an increase of 484 products traded since the division’s 2004 review,” the oversight division said.

Nymex and Comex “should continue to take such ongoing steps as necessary to ensure that market regulation staff is increased appropriately whenever necessary in light of [increased] trading volume, products traded, future and options industry changes, new responsibilities assigned to market regulation, or other relevant developments,” the report said.

“CME Group has increased its market regulation staffing by more than 20% in the past two years, and we continually ensure that our human resources and regulatory technology fully support our industry-leading regulatory programs,” responded CME spokesman Chris Grams. “We are pleased with the CFTC’s rule enforcement review and their findings that we maintained effective audit trail, trade practice and disciplinary programs. These findings reflect our ongoing commitment to effectively fulfill our self-regulatory responsibilities.”

Of 59 trade practice investigations that were closed by exchange market regulation monitors during 2009, the Commission said it found that the investigations “were thorough and well documented, and included appropriate, well founded analyses.”

The exchanges closed 27 cases involving disciplinary actions in the target period, during which they assessed nearly $2 million in fines. The oversight division “found that most sanctions imposed appear[ed] reasonable relative to the violations alleged and evidence presented.” The agency, however, took issue with a $5,000 penalty and five-week suspension against a floor broker in 2009 for noncompetitive trading, prearranged trading, withholding orders and conduct detrimental to the exchange. The oversight division believed a “larger sanction was warranted,” given that the broker had committed similar violations in 2008 and was fined $85,000 at the time.

Nymex and Comex “should ensure that…meaningful sanctions [are imposed] on members who violated the same or similar exchange rules to discourage recidivist activity,” the report said.

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