Following a rule enforcement review of the New York Mercantile Exchange’s practices by the Commodity Futures Trading Commission’s Division of Market Oversight (DMO), the Commission found that Nymex performed most functions adequately. However, the review also highlighted areas that need to be enhanced.

The Commission’s DMO assessed Nymex’s compliance with those core principles that relate to audit trail, trade practice surveillance, disciplinary, and dispute resolution programs. The target period for the review was Jan. 1, 2003 through Dec. 31, 2003.

The DMO found that Nymex’s disciplinary action was inconsistent. During the target period, Nymex took disciplinary action in 16 separate cases, all resolved pursuant to settlement agreements. While the sanctions imposed in a majority of the cases appeared reasonable relative to the violations committed, DMO identified five cases in which a disciplinary committee did not follow the Compliance Department’s recommendations for more substantial sanctions, including sanctions imposed on some repeat offenders. The Division also found that in two of the five cases, restitution was calculated and recommended by Compliance staff, but not included in the final settlements.

As a result, the DMO recommended that disciplinary committees give careful consideration to Compliance staff’s recommendations, and, if a committee’s sanctions ultimately differ from those recommended by staff, articulate their rationale in committee minutes. The Division further recommended that disciplinary committees “ensure that all sanctions and settlements are sufficient to serve as an effective deterrent, particularly with respect to repeat offenders, and that restitution be ordered where the amount of customer harm can reasonably be determined.”

The DMO found that Nymex maintains an adequate audit trail program that allows it to assign one-minute trade times that are based on pit card timestamps and to reconstruct trading. The Division also found that Nymex provides for the recording and safe storage of trade information in a manner that allows staff to use the information to detect and prosecute rule violations.

However, the DMO found two aspects of the audit trail program that should be enhanced. The Division highlighted the fact that members demonstrated a significantly higher level of pit card submission timeliness for outright trades than for spread trades. Therefore, the DMO recommended that Nymex “include spread trades in its trade timing summary enforcement program.” The second function in need of enhancement involved the selection methodology used for order ticket record keeping reviews, which the DMO said does not provide for sufficient coverage of Nymex’s floor population. The Division recommended that Nymex increase the number of broker groups and individual brokers reviewed annually in order ticket reviews.

On the topic of Nymex’s practice surveillance program, the DMO found it to be adequate. “Nymex uses floor surveillance and a computerized trade practice surveillance system to monitor its markets,” the Division said. “Investigations were thorough and well documented, and investigation reports included sufficient analysis to support staff’s conclusions. In addition, investigations were completed in a timely manner.”

Regarding Nymex’s voluntary dispute resolution practices, the DMO found them to be fair, timely and equitable.

Now that Nymex has been informed of the review results, the exchange will have 60 days to respond in writing to the DMO’s recommendations.

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