CME Must Improve Surveillance of Derivatives Trades, CFTC Says

CME Group Inc., owner of the world’s largest futures exchange, must improve surveillance of transactions on its systems and require traders to keep better records, the Commodity Futures Trading Commission said.

CME, which is also a self-regulatory organization, had inadequate systems to oversee trades that result in an exchange for a related cash or derivative position, the Washington-based CFTC said in a 75-page enforcement review released today.

“An improved and robust program is necessary,” the agency said in the review. Chicago-based CME should require all firms that clear the trades to have a “more robust audit process,” the agency said.

The CFTC conducts reviews of trading platforms to ensure compliance with derivatives regulations, including new measures required by the Dodd-Frank Act. The enforcement review released today covered trades between November 2010 and October 2011.

Many of the CFTC’s recommendations have already been implemented, according to Laurie Bischel, a spokeswoman for CME.

“We are committed to ensuring fair, well-regulated markets for all of our customers and are continually working to enhance the oversight of our markets,” Bischel said in an e-mail statement.

The CFTC review focused on transactions known as exchanges for related positions. The trades are privately negotiated and can include futures, options, swaps and cash positions. There were about 484,000 such trades during the period of the review.

The exchange’s market surveillance unit opened only 16 cases related to the trades, the CFTC said. The “relatively small number” of cases opened and growth in such trades since the review requires the exchange to examine whether they are “adequately targeting, reviewing and, where necessary, escalating potentially problematic” trades, the agency said.

The review also requires CME to improve oversight of potential violations of limits on speculation. The exchange’s surveillance unit should use its discretion to refer matters for possible enforcement action, the CFTC said.

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