Commodity Futures Regulation:

Current Status and Unresolved Problems

CED-82-100: Published: Jul 15, 1982. Publicly Released: Jul 15, 1982.

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GAO conducted a review of the programs of the Commodity Futures Trading Commission to assess whether the Commission's programs meet the objectives established by Congress and measure up to the Commission's own stated objectives. This review was conducted to assist Congress in evaluating the Commission's performance in conjunction with its reauthorization.

GAO stated that the Commission has made progress in developing a regulatory framework to protect commodities customers and that the principal federal programs for commodities futures regulation must continue if futures trading is to operate reasonably free from abuse. Even if the exchanges assume increasing responsibility for key aspects of regulating futures trading, the federal government must continue to monitor exchange performance to determine whether self-regulation is working. The Commission's program to review the exchanges' rule enforcement procedures and performance have not covered all aspects of exchange programs often enough and have not promptly followed up on previously identified deficiencies. The Commission more thoroughly analyzes information submitted to support contract approval than it previously did; however, it still needs to strengthen and clarify its approval requirements and devote more effort to existing contracts to determine if they are actually meeting their economic function. Weaknesses in the Commission's automatic data processing (ADP) programs prevent it from collecting and analyzing market data in a way that can effectively support its surveillance program. The Commission's efforts to register industry professionals and to identify and remove unfit individuals can also be improved. The reparations program is not meeting its objectives as it takes an average of 3 years to complete the reparations process, complainants have difficulty understanding the program, and the process is expensive.

Matters for Congressional Consideration

  1. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should: (1) raise the dollar limitation on the amount customers can compel exchange members to arbitrate from $15,000 to $25,000; (2) authorize the Commodity Futures Trading Commission to periodically adjust this dollar limitation as warranted by inflation and to reflect the size of claims submitted to the reparations program; (3) raise the dollar limitation on the amount that customers will be able to compel National Futures Association members to arbitrate from $15,000 to $25,000; and (4) authorize the Commission to periodically adjust this dollar limitation as warranted by inflation and to reflect the size of claims submitted to the reparations program.

  2. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should clarify section 17(b)(4)(E) of the Commodities Exchange Act to ensure that any registered futures association, upon approval by the Commodity Futures Trading Commission, can collect the fingerprints of its members and submit those fingerprints to the Federal Bureau of Investigation for identification and processing.

  3. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should: (1) amend section 8a of the Commodities Exchange Act and insert a new subsection to allow applicants/registrants to appeal to the Commodity Futures Trading Commission any registration decision made by a registered futures association; (2) amend sections 4f and 4n of the Act to authorize a registered futures association to register futures commission merchants, commodity trading advisors, commodity pool operators, and floor brokers in lieu of registration with the Commission; and (3) amend section 4p of the Act to allow for the testing of commodity trading advisors and commodity pool operators and to allow any registered futures association to develop and administer such tests for all categories of Commission registrants upon Commission approval.

  4. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should amend section 8a(6) of the Commodities Exchange Act to authorize the Commodity Futures Trading Commission to routinely disclose large-trader information to contract markets for market surveillance purposes with adequate safeguards to protect the information's confidentiality.

  5. Status: Closed - Implemented

    Comments: When we determine what steps the Congress has taken, we will provide updated information.

    Matter: Congress should reauthorize the existing federal commodity regulatory programs.

Recommendations for Executive Action

  1. Status: Closed - Not Implemented

    Comments: Commission officials disagree with the GAO opinion that the Commission should conduct comprehensive rule enforcement reviews. They believe that selective, in-depth audits are more productive and that these types of audits encourage exchanges to improve the effectiveness of their rule enforcement programs.

    Recommendation: The Commodity Futures Trading Commission should: (1) reallocate its resources to provide greater support to the rule enforcement review program; (2) place greater emphasis on reviews that cover carefully selected aspects of exchange activities, but only after a period of comprehensive reviews has established that exchanges have effectively functioning self-regulatory programs; (3) increase the frequency of selective reviews once the transition from comprehensive reviews has been accomplished; (4) establish substantive followup procedures to ensure that exchanges correct identified rule enforcement deficiencies with reasonable promptness; (5) supplement the rule enforcement review process with a requirement that exchanges provide necessary evidence to demonstrate that their compliance programs satisfy statutory and Commission requirements; (6) develop more specific standards for exchange self-regulatory programs and more objective criteria to assess exchange self-regulatory performance; and (7) establish a firm link between contract market designation and compliance with exchange rule enforcement responsibilities, designating additional contracts only on those exchanges able to demonstrate satisfactory compliance with self-regulatory responsibilities.

    Agency Affected: Commodity Futures Trading Commission

  2. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should work with industry officials and NFA to encourage the use of the association as an arbitration forum.

    Agency Affected: Commodity Futures Trading Commission

  3. Status: Closed - Not Implemented

    Comments: Commission officials believe that they currently report pertinent program statistics in such a manner that Congress can be fully informed. Program statistics are published quarterly and are available to the public.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should report pertinent program statistics to Congress on a regular basis to enable it to make informed judgments concerning the performance and future of the reparations program.

    Agency Affected: Commodity Futures Trading Commission

  4. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should computerize all management information concerning the reparation program.

    Agency Affected: Commodity Futures Trading Commission

  5. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should develop a plan for the NFA takeover of registration functions. This plan should be preceded by an analysis of the role NFA can and should play in registration, the Commission's residual role in registration, how the Commission will perform oversight of NFA registration activities, and the information that will be needed to perform this oversight.

    Agency Affected: Commodity Futures Trading Commission

  6. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should work with the American Institute of Certified Public Accountants to provide for the timely publication of audit guidelines for use by independent public accountants in performing audits of futures commissions merchants.

    Agency Affected: Commodity Futures Trading Commission

  7. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should develop a plan for transferring specific audit functions to NFA.

    Agency Affected: Commodity Futures Trading Commission

  8. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should encourage NFA to expeditiously establish proficiency testing and qualification standards for Commission registrants.

    Agency Affected: Commodity Futures Trading Commission

  9. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should: (1) adopt the proposed Guideline I revisions; (2) establish procedures for analysis economists to follow in contacting cash market participants including use of the expertise of Commission surveillance economists; and (3) require analysis economists to contact a significant portion of the potential hedgers who submit statements on behalf of an exchange applying for contract approval.

    Agency Affected: Commodity Futures Trading Commission

  10. Status: Closed - Not Implemented

    Comments: The Commission has adopted regulations on low volume and dormant contracts.

    Recommendation: The Commodity Futures Trading Commission should establish an effective approach for reviewing existing contract markets which include: (1) adopting the proposed rules on dormant and low-volume contracts; (2) identifying contracts that may not be serving an economic purpose and requiring exchanges to demonstrate that these contracts continue to comply with economic requirements; and (3) using surveillance economists to review terms and conditions of existing contracts for conformity to current cash market practices.

    Agency Affected: Commodity Futures Trading Commission

  11. Status: Closed - Not Implemented

    Comments: Commission officials believe that because exchange arbitration programs are used only by members of the exchanges and not by the trading public, their relative importance is small. They prefer to review other exchange programs which affect the trading public and review the NFA arbitration program.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should direct the staff to perform an evaluation of all exchange arbitration programs to determine whether they are meeting all legal requirements.

    Agency Affected: Commodity Futures Trading Commission

  12. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should collect and analyze the detailed processing information needed to effectively manage the reparations program and assess its performance.

    Agency Affected: Commodity Futures Trading Commission

  13. Status: Closed - Not Implemented

    Comments: Reparation rules have been rewritten. However, the Commission did not rewrite them for the purpose of simplification. Agency officials stated that the new rules are still complex although an attempt was made to clarify some of the language.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should direct that the reparations rules be rewritten in plain English and simplified as much as possible.

    Agency Affected: Commodity Futures Trading Commission

  14. Status: Closed - Not Implemented

    Comments: The agency disagrees with the recommendation. According to its officials, complaints are currently being assigned within 30 days after receipt of the filing fees. Additionally, a proceeding officer handles the discovery process prior to assignment of complaints to a judge. It also felt that cases varied so widely that it would not be possible to set performance standards.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should consult with the chief administrative law judge to: (1) assign all reparations complaints to the administrative law judges' dockets as soon as the complainants' filing fees have been received; and (2) establish objective performance standards for administrative law judges that would explain what is expected in terms of performance and productivity.

    Agency Affected: Commodity Futures Trading Commission

  15. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Chairman of the Commodity Futures Trading Commission should direct the agency's Executive Director to: (1) establish a comprehensive information resource management planning process; (2) establish a standard agencywide project management process that will be applicable to each major software development project; (3) emphasize the importance of strong and effective ADP management; and (4) present for Commission consideration and approval a charter establishing the newly organized executive steering committee as a standing Commission committee and setting forth clearly its responsibilities and authority.

    Agency Affected: Commodity Futures Trading Commission

  16. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should: (1) reduce the number of audits of member future commission merchants (FCM's) and rely instead upon the exchanges to be the primary monitors of these FCM's; (2) devote additional audit resources to monitoring nonmember FCM's and commodity pool operators; (3) provide additional specific guidance on how to conduct exchange audit and financial surveillance programs; (4) perform more frequent reviews of the exchanges' audit and financial surveillance programs and perform more active followup so that exchanges modify their audit and financial surveillance programs to comply with the Commission's recommendations; and (5) conduct reviews of exchange audit and financial surveillance programs in conjunction with rule enforcement reviews.

    Agency Affected: Commodity Futures Trading Commission

  17. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should: (1) implement by the July 1, 1982, target date associated persons sponsorship and the fingerprinting of registration applicants; (2) review the fitness of registrants against Security and Exchange Commission and Federal Bureau of Investigation files on a spot check basis during reregistration; and (3) revise its rules to require the registration of sales and supervisory personnel of commodity trading advisors and commodity pool operators.

    Agency Affected: Commodity Futures Trading Commission

  18. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should comprehensively address how to assure that exchanges have available adequate large-trader data. This can be accomplished by using the Commission's planned options program to test the ability of exchanges to successfully collect and process large-trader data and by broadening the August 1980 proposed rules on large-trader data collection to assess the issues surrounding the Commission's routine supply of large-trader data to exchanges in return for a fee.

    Agency Affected: Commodity Futures Trading Commission

  19. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should: (1) establish and implement a project to improve its large-trader reporting system which includes defining surveillance economists' needs regarding large-trader data and reporting outputs, exploring the use of machine-readable inputs, and identifying resources needed to maintain the necessary accuracy level; and (2) establish a program to improve the application of automatic data processing in routine analysis of surveillance data, and to develop more sophisticated analytical techniques for surveillance.

    Agency Affected: Commodity Futures Trading Commission

  20. Status: Closed - Implemented

    Comments: When we confirm what actions the agency has taken in response to this recommendation, we will provide updated information.

    Recommendation: The Commodity Futures Trading Commission should charge a fee to collect contract approval process costs.

    Agency Affected: Commodity Futures Trading Commission

  21. Status: Closed - Not Implemented

    Comments: Agency officials believe that information necessary for a contract application is best judged on a case-by-case basis.

    Recommendation: The Commodity Futures Trading Commission should: (1) require exchanges to supply, at the time of their application, all the relevant support they intend to submit to demonstrate economic purpose; (2) establish written staff deadlines for all phases of the review process; and (3) require senior level officials to perform an initial contract review and brief the assigned economist on contract aspects that should be explored.

    Agency Affected: Commodity Futures Trading Commission

 

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