CMEs Market Surveillance Found Lacking by Its Chief Regulator

(Bloomberg) — CME Group Inc.s efforts to police its exchanges, which are some of the biggest in the world, should be improved, according to its primary regulator.

Although CME generally meets its surveillance obligations, shortcomings include taking too long to finish probes, having insufficient investigators and imposing penalties that are too small, the Commodity Futures Trading Commission said Monday. Two of CMEs markets, Nymex and Comex, need to keep developing ways of detecting a form of manipulation known as spoofing, the CFTC said in a statement on its website.

We appreciate the Commissions review, Laurie Bischel, a CME spokeswoman, said in an e-mail. A number of the items noted in its reports have already been addressed and remediated, and we are continuing to review the Commissions findings.

Because they are self-regulatory organizations, exchanges such as CMEs have a role in rooting out problematic behavior on their markets, even though they are also overseen by a government entity. That makes CME responsible for monitoring some of the worlds busiest markets, where traders can buy and sell futures contracts tied to oil, stock benchmarks like the Standard & Poors 500 Index, and interest rates.

The CFTC said to these guys, Hey, you need to speed things up, said John Lothian, a Chicago-based futures professional who publishes industry newsletters. They didnt say, Theres major material deficiencies. Still, the list of shortcomings is rather long, he added.

Time Delays

According to the CFTC, Nymex and Comex must complete investigations in one year or less, absent mitigating circumstances. Those markets need a system to identify the source of time delays, the agency said.

Four of the companys markets — the Chicago Board of Trade, Chicago Mercantile Exchange, Comex and Nymex — should take appropriate measures to ensure that internal deliberations do not interfere with the prompt resolution of disciplinary matters, according to the CFTC.

Additionally, the CBOT and CME must ensure that their program for reviewing front-end audit trail data is effective and the reviews are conducted in a timely manner, the regulator said. Also, fines for traders who dont have sufficient data on their trading must be meaningful and sufficient to deter recidivist behavior, the CFTC said.