Commodity Futures Trading Commission and the Chicago Futures Exchanges' Detection of Trade Practice Abuses

T-GGD-89-8: Published: Feb 23, 1989. Publicly Released: Feb 23, 1989.

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GAO discussed how the Commodity Futures Trading Commission (CFTC), the Chicago Mercantile Exchange (CME), and the Chicago Board of Trade (CBT) detect and punish trading abuses. GAO found that: (1) CME and CBT identified and investigated trade practices abuses through internal sources, including audited trade information, trading floor activity, exchange member and customer complaints, and CFTC referrals; (2) member and customer complaints were the source of 133 of the 164 CME investigations in 1988; (3) the exchanges used audit trail systems to reconstruct trading activities and help detect questionable trades; (4) CFTC amended its audit trail regulations to require that the exchanges determine trade execution times to within 1 minute instead of within a 30-minute bracket; (5) if an exchange failed to meet its obligations to enforce exchange rules, CFTC could direct the exchange to improve its enforcement activity or forfeit its operating authority; (6) CFTC concluded that CME had an effective trade practice surveillance and reconstruction system, but CBT needed to improve its reconstruction system; and (7) although CBT made some improvements, its inquiries took too long and resulted in too few disciplinary actions. GAO believes that Congress may wish to pursue whether: (1) CFTC and the exchanges adequately assess trading system vulnerabilities and establish adequate controls; (2) the 1-minute timing standard is sufficient; (3) reliable data is available to determine the universe of abuses; and (4) CFTC and the exchanges have the information they need to improve their oversight.

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