RULE ENFORCEMENT REVIEW 

OF THE 

NEW YORK MERCANTILE EXCHANGE

Division of Market Oversight 

September 16, 2004 
Table of Contents 

I. INTRODUCTION: PURPOSE AND SCOPE....................................................................... 1 

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS............................................... 3 

A. Audit Trail Program........................................................................................................ 3 

B. Trade Practice Surveillance Program.............................................................................. 4 

C. Disciplinary Program ...................................................................................................... 4 

D. Dispute Resolution Program........................................................................................... 5 

III. AUDIT TRAIL PROGRAM.................................................................................................... 6 

A. Order Flow and Recordkeeping Procedures ................................................................... 7 

B. One Minute Timing Compliance .................................................................................. 10 

C. Recordkeeping: Trading Cards and Order Tickets ...................................................... 12 

1. Trading Cards....................................................................................................... 12 

2. Order Tickets........................................................................................................ 14 

D. Safe Storage Capability ................................................................................................ 17 

E. Conclusions and Recommendations.............................................................................. 18 

IV. TRADE PRACTICE SURVEILLANCE PROGRAM.......................................................... 20 

A. Compliance Staff .......................................................................................................... 21 

B. Electronic Surveillance ................................................................................................. 22 

C. Floor Surveillance......................................................................................................... 25 

D. Adequacy of Investigations .......................................................................................... 26 

E. Conclusion and Recommendations ............................................................................... 28 

V. DISCIPLINARY PROGRAM ............................................................................................... 29 

A. Disciplinary Committees and Procedures..................................................................... 29 

1. The Business Conduct Committee....................................................................... 29 

2. Adjudication Committee ...................................................................................... 31 

B. Adequacy of Sanctions.................................................................................................. 32 

C. Timeliness of Disciplinary Process............................................................................... 37 

D. Conclusions and Recommendations ............................................................................. 37 

VI. DISPUTE RESOLUTION PROGRAM................................................................................ 39 

A. Customer Arbitration .................................................................................................... 39 

B. Member-to-Member Arbitration................................................................................... 43 

C. Arbitrations During the Target Period .......................................................................... 43 

D. Conclusions and Recommendations ............................................................................. 43 
RULE ENFORCEMENT REVIEW 

OF THE 

NEW YORK MERCANTILE EXCHANGE 

I. INTRODUCTION: PURPOSE AND SCOPE 

The Division of Market Oversight (“Division”) has completed a rule enforcement review 

of the audit trail, trade practice surveillance, disciplinary, and dispute resolution programs of the 

New York Mercantile Exchange (“NYMEX” or “Exchange”) for compliance with related core 

principles under Section 5(d) of the Commodity Exchange Act (“Act”) and Part 38 of the 

Commission’s regulations. The review covers the period of January 1, 2003 through December 

31, 2003 (“target period”).1 

Specifically, the Division evaluated the Exchange’s compliance with five core principles: 

Core Principle 10– Trade Information and Core Principle 17- Recordkeeping, relate to the 

maintenance of an audit trail that can be used to assist a contract market in the identification and 

prosecution of customer and market abuses and the maintenance of trade-related records; Core 

Principle 2- Compliance with Rules and Core Principle 12- Protection of Market Participants, 

relate to surveillance, enforcement, and disciplinary procedures used by a contract market to 

protect market participants from abusive trading practices; and Core Principle 13- Dispute 

Resolution, relates to fair and equitable dispute resolution procedures for customer and member-

 

1

 This review does not include the COMEX Division of the NYMEX. Rule enforcement reviews prepared by the 

Division are intended to present an analysis of an exchange's overall compliance capabilities for the period under 

review. Such reviews deal only with programs directly addressed in the review and do not assess all programs. The 

Division's analyses, conclusions, and recommendations are based, in large part, upon the Division's evaluation of a 

sample of investigation and disciplinary case files, and other exchange documents. The evaluation process, in some 

instances, identifies specific deficiencies in particular exchange investigations or methods but is not designed to 

uncover all instances in which an exchange does not address effectively exchange rule violations or other 

deficiencies. Neither is such a review intended to go beyond the quality of the exchange's self-regulatory systems to 

include direct surveillance of the market, although some direct testing is performed as a measure of quality control. 
2

to-member disputes.2

 

To assess the Exchange’s compliance with these core principles, Division staff reviewed 

numerous documents used by the NYMEX’s Compliance Department (“Compliance” or 

“Compliance Department”) in performing the Exchange’s self-regulatory responsibilities. These 

documents included, among others, computer reports and other documentation used routinely for 

audit trail enforcement and trade practice surveillance; trading card and order ticket reviews; 

trade practice investigation and inquiry files; disciplinary action files; investigation, inquiry, 

recordkeeping, audit trail, disciplinary, and floor surveillance logs; minutes of disciplinary 

committee meetings held during the target period; and Compliance guidelines. In addition, 

Division staff interviewed senior Compliance officials, including the Senior Vice President of 

Compliance and Risk Management, the Vice President of Compliance, the Associate Counsel, 

the Director and Associate Director of Trade Practice Surveillance, and a Senior Manager.3

 The Division provided the Exchange an opportunity to review and comment on a draft of 

this report on August 12, 2004. On August 31, 2004, Division staff conducted an exit conference 

with Exchange officials to discuss the report’s findings and recommendations. 

 

2

 Appendix B to Part 38 of the Commission’s regulations provides guidance concerning the core principles with 

which a designated contract market must comply to maintain its designation. In addition, Appendix B provides 

acceptable practices for several of the core principles. Although the acceptable practices establish non-exclusive 

safe harbors, they do not establish a mandatory means of compliance with the core principles. Appendix B provides 

acceptable practices for Core Principles 2, 10, 13, and 17. However, acceptable practices are not set forth for Core 

Principle 12. In promulgating Part 38, the Commission reserved the authority to adopt acceptable practices for Core 

Principle 12 at a later date. 

3

 A copy of the March 5, 2004 interview transcript can be found in Appendix 1. Cites to the transcript are herein 

referenced as “Transcript, p. _.” 
3

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS

A. Audit Trail Program 

Findings 

• The Exchange’s audit trail program provides for the recording and safe storage of 

trade information in a manner that allows staff to use the information to assist in 

the prevention of customer and market abuses and to provide evidence of rule 

violations. 

• The Exchange conducts annual trading card reviews of each floor member and 

bimonthly order ticket reviews of selected floor members to assess members’ 

compliance with recordkeeping requirements. The order ticket and trading card 

reviews were thorough, well documented, and completed in a timely manner. 

• The Exchange’s methodology for selecting members for order ticket reviews does 

not provide for sufficient coverage of the floor population. During the target 

period, only nine of its approximately 263 floor brokers were examined for 

compliance with order ticket recordkeeping requirements. 

• Trade execution times are assigned to each trade based on pit card timestamps. 

Pit cards are required to be submitted by the seller within one minute of 

execution. Members with pit card submission timeliness rates below 80 percent 

for outright trades are subject to warning letters and graduated summary fines. 

However, spread trades are not included in the summary enforcement program, 

which has resulted in significantly lower rates of compliance for spread trades 

versus outright trades. 

Recommendations 

• The Exchange should include spread transactions in its pit card/one-minute 

trade timing summary enforcement program. 

• The Exchange should increase the number of broker groups and individual 

floor brokers reviewed annually in routine floor order ticket reviews to a 

level that would ensure that a sample of each broker’s floor order tickets are 

subject to examination within a reasonable period of time.
4

B. Trade Practice Surveillance Program

Findings 

• The Exchange maintains an adequate trade practice surveillance program that is 

administered by an experienced staff. 

• The Exchange uses, among other things, a computerized trade practice 

surveillance system and floor surveillance to monitor its markets for potential 

trading violations. During the target period, the Exchange opened 109 

investigations and closed 105 investigations, including 20 investigations that were 

referred for disciplinary action. Most of the investigations were generated from 

the computerized surveillance system. 

• Investigations were thorough and well documented, and investigation reports 

included sufficient analyses to support Compliance staff’s conclusions and 

recommendations. In addition, investigations were expanded to include 

additional trading dates or members where appropriate. 

• During the target period, the Exchange focused on closing aged investigations. In 

this connection, the Exchange closed 16 investigations that had been open for 

more than one year. Thirteen of these 16 investigations resulted in referrals for 

disciplinary action. By the end of the target period, the Exchange had 

accomplished its goal of having no investigation on its log open for more than one 

year. 

The Division has no recommendations in this area. 

C. Disciplinary Program 

Findings 

• The Exchange took disciplinary action against 16 members, one member firm, 

and one clearing member in 16 separate cases. The sanctions imposed by the 

Exchange in the majority of the cases appear reasonable relative to the violations 

committed. 

• All of the cases were resolved through Adjudication Committee settlement 

agreements. Eleven involved trade practice violations, four involved 

recordkeeping violations, and one was primarily a market surveillance case with 

trade practice elements. The sanctions assessed by the Exchange included a total 

of $2,718,500 in fines, five suspensions, and three instances of customer 

restitution totaling $27,510. 
5

• In five of the 16 cases, the Adjudication Committee did not follow the 

Compliance Department’s recommendations for more substantial sanctions, 

including sanctions imposed on some repeat offenders. This raises concerns as to 

the adequacy of the sanctions imposed in these cases. In addition, in two of the 

five cases, restitution was calculated and recommended by Compliance staff, but 

was not included in the final settlements.

Recommendations 

• Exchange disciplinary committees should give careful consideration to 

Compliance staff’s recommended sanctions, and, in those instances where the 

committees’ sanctions ultimately differ from those recommended by 

Compliance, the committees should articulate their rationale in committee 

minutes. 

• Exchange disciplinary committees should ensure that all sanctions and 

settlements are sufficient to serve as an effective deterrent, particularly in 

those cases involving repeat offenders. 

• Restitution should be ordered in settlements and Exchange disciplinary 

decisions where the amount of customer harm can reasonably be determined. 

D. Dispute Resolution Program 

Findings 

• The Exchange’s arbitration rules provide fair and equitable procedures for the 

resolution of customer and member disputes. Customers have the opportunity to 

have their claims heard by unbiased panels, including panels where a majority of 

the panelists are not members of, or associated with, any member of a contract 

market. 

• The Exchange’s arbitration rules require a prompt hearing and authorize prompt, 

written awards that are not subject to appeal within the Exchange. 

• The one dispute decided during the target period was resolved in accordance with 

Exchange rules and procedures.

The Division has no recommendations in this area. 
6

III. AUDIT TRAIL PROGRAM 

Core Principle 10 – Trade Information: 

The board of trade shall maintain rules and procedures to provide for the recording 

and safe storage of all identifying trade information in a manner that enables the 

contract market to use the information for purposes of assisting in the prevention of 

customer and market abuses and providing evidence of any violations of the rules of 

the contract market. 

Core Principle 17 – Recordkeeping: 

The board of trade shall maintain records of all activities related to the business of 

the contract market in a form and manner acceptable to the Commission for a 

period of five years. 

Pursuant to the acceptable practices set forth in Appendix B to Part 38 of the 

Commission’s regulations, an effective contract market audit trail should capture and retain 

sufficient trade-related information to permit contract market staff to detect trading abuses and to 

reconstruct transactions within a reasonable period of time. In addition, the contract market must 

create and maintain an electronic transaction history database that contains information with 

respect to transactions executed on the designated contract market. An acceptable audit trail also 

must be able to track a customer order from time of receipt through fill allocation or other 

disposition. Further, an acceptable audit trail should include original source documents,

transaction history, electronic analysis capability, and safe storage capability. 

Original source documents include unalterable, sequentially identified records on which 

trade execution information is originally recorded, whether manually or electronically. A 

transaction history consists of an electronic history of each transaction, including all data that are 

input into the trade entry or matching system for the transaction to match and clear. These data

should include the categories of participants for whom such trades are executed; timing and 

sequencing data adequate to reconstruct trading; and the identification of each account to which 

fills are allocated. An electronic analysis capability permits sorting and presenting data included 
7

in the transaction history so as to reconstruct trading and to identify possible trading violations, 

while safe storage capability provides for a method of storing the data included in the transaction 

history in a manner that protects the data from unauthorized alteration, accidental erasure, or 

other loss. 

Commission Regulation 1.31 governs the manner in which an exchange is required to 

maintain trade-related records. The regulation mandates that all records required to be kept

under the Act or Commission regulations be maintained for five years and be readily accessible 

during the first two years. Most categories of required records may be stored on either 

micrographic or electronic storage media for the full five-year maintenance period. However, 

trading cards, documents on which trade information is originally recorded in writing, and order 

tickets, must be retained in hard copy for five years. 

A. Order Flow and Recordkeeping Procedures

Open outcry orders at NYMEX are typically transmitted to the trading floor either by 

telephone or electronically through the Trade Order Processing System, an industry-wide order 

routing system, or through a member’s proprietary order routing system. Telephone orders are 

immediately written-up on an order ticket by a floor broker’s clerk and stamped with an entry 

timestamp. The information documented on an order ticket must be recorded in non-erasable 

ink, and include the terms of the order, a customer identifier, and an order number. The order 

ticket is timestamped again when report of execution is made. For all electronically transmitted 

orders, the order routing system automatically prints an order ticket that includes the terms of the 

order, a customer identifier, an order number, and the time of the order.4

 Once an order is filled, 

the floor broker or his or her clerk records the fill price in writing on the order ticket. The order 

 

4

 NYMEX Rule 6.18(A)(ii) lists the requirements for floor order tickets. 
8

ticket is then brought back to the clerk’s booth, where the clerk confirms the fill to the customer 

and timestamps the order ticket a second time. 

The Exchange requires that each member promptly record all executed transactions on a 

sequentially numbered, pre-printed trading card that is issued by the Exchange.5 The Exchange 

provides members with an integrated pad that consists of two sets of documents, the trading card 

and the pit card. The top document on the pad is the trading card, which consists of three softply (one original and two copies), color coded sheets, with spaces for up to nine trades. The 

bottom document consists of four sequentially numbered hard-ply pit cards that are virtual 

duplicates of the trading card. When trade information is recorded on the trading card, that 

information is concurrently recorded on the uppermost pit card. The seller then must submit the 

pit card within one minute of the transaction by throwing the card into a netted area in the center 

of the pit where an Exchange employee retrieves and timestamps the card.6 This timestamp 

represents the one-minute execution time.7

 

 

5

 NYMEX Rule 6.90 requires members to record information for all transactions, including the member’s symbol, 

opposite member, clearing member, date, price differential or premium, commodity, quantity, delivery month or 

expiration date, and additionally, for options, strike price and a put/call indicator. With the exception of trades 

executed on the open or close, members must record the execution time of the first trade made on each trading card. 

In addition, all trades must be recorded in non-erasable ink, in exact chronological order of execution, on sequential 

lines of the trading card without skipping lines between trades. Any remaining lines on a trading card must be 

crossed out. Errors on cards may be corrected, but originally recorded information may not be obliterated or 

otherwise made illegible. Trades made during an exchange’s opening and closing periods must be separately 

identified. 

6

 Trade information recorded on the trading card is duplicated onto the then-uppermost pit card. As a result, all of 

the trade data recorded on the trading card is also recorded on one or more associated pit cards. The pit card (and 

trading card) reflects essential trade matching data, including the commodity, date, identity of the executing and 

opposite broker, contract month, and price (or, in the case of spreads, the differential). For option trades, the pit card 

also reflects the strike price and a put/call indicator. In addition, with the exception of trades executed during the 

opening or closing ranges, Exchange members are required to manually record the execution time of the first trade 

made on each trading card. 

7

 Pursuant to NYMEX Rule 6.90(D), pit cards are used to report the sale of futures and options contracts within one 

minute of execution in accordance with NYMEX Rule 6.10. Additionally, if any hard-ply contains only purchases 

of futures or options contracts, the floor member must submit the hard-ply of the trading card, i.e., the pit card, to the 

Exchange prior to using the next sequentially numbered trading card. This pit card is normally time stamped but the 

timestamp is not entered into the Exchange’s Trade Matching System (“TMS”). However, the pit card can be used 

to assist in the reconstruction of trading. 
9

After the pit card is time stamped, the trade data are entered into the Trade Matching 

System (“TMS”) by Exchange data entry personnel. Within approximately 4 to 10 minutes, the 

pit card data appear on both the buyer’s and seller’s computer screens for validation and entry of 

the remaining required data for clearing, including customer identifier, customer type indicator 

(“CTI”) code, and clearing member identifier.8

 The completed data are used for clearing 

purposes and become the basis for the “Streetbook,” the Exchange’s daily trade register, and 

TXN, the Exchange’s automated trade monitoring system.9

 

With respect to customer orders entered on ACCESS, the Exchange’s internet-based 

electronic trading system, NYMEX Rule 6.22(D) requires that customer orders be immediately 

entered into the system within one minute of receipt, or, if such orders cannot be entered into the 

system within one minute of receipt, they must be recorded on a paper order ticket and time 

stamped within one minute of receipt, and entered into the system as soon as practicable.10 

ACCESS orders, like floor orders, must contain the terms of the order, CTI code, clearing

member, and account designation. ACCESS automatically records the order number, time of 

entry into the system, and the time that the order is matched. ACCESS also automatically 

records the time of any modifications made to an order before it is matched. 

All of the trade data that comprise NYMEX’s audit trail, for both open outcry and 

 

8

 NYMEX Rule 9.04(M) requires that the customer account number, clearing member number, and CTI code be 

submitted to the Exchange by the executing floor member within one hour after the initial transfer information is 

supplied by the Exchange. 

9

 TXN is the name of the firm that originally provided the Exchange with the first version of its automated trade 

surveillance system. 

10 NYMEX ACCESS lists the Exchange’s energy, platinum, and palladium futures contracts, as well as COMEX 

metals futures contracts, for after-hours trading. NYMEX ACCESS market participants who have successfully 

executed a Primary Clearing Member Agreement and a NYMEX ACCESS User Agreement may trade NYMEX 

ACCESS contracts through personal computers. The Exchange’s other electronic trading system, ClearPort, is an 

internet-based system that allows market participants to trade futures contracts that replicate popular OTC energy 

derivatives, or market participants may conduct their own off-exchange transactions, negotiate their own prices, and 

submit the transactions for clearing through the ClearPort clearing system. Market participants primarily use 
10

ACCESS trades, are contained in the Streetbook. The Streetbook, along with timing and 

sequencing information from order tickets, trading cards, and the Price Change Register (“PCR” 

or “time and sales”), allows Exchange staff to reconstruct transactions for investigation and 

evidentiary purposes. 

B. One Minute Timing Compliance 

The Exchange monitors members’ compliance with the one-minute pit card submission 

requirement through use of the Pit Card Validation Report. This report compares pit card times 

to trade times appearing on the PCR for all outright and intra-commodity spread transactions. 

The Pit Card Validation Report reflects all outright and intra-commodity spread sell transactions 

for each member, the number and percentage of such transactions which are valid and invalid, 

and, for those that are invalid, the number of minutes that the pit card is late. The report deems a 

trade to be valid when the PCR shows a print of the trade price at a point during the minute 

before, the minute of, or the minute after the actual timestamp on the transaction’s pit card. 

To assess the accuracy of the Exchange’s pit card times, the Division reviewed the Pit 

Card Validation Report for two randomly selected days during each of the 12 months within the 

target period. The combined daily percentage of compliance with the Exchange’s one-minute 

timing standard for outright and intra-commodity spreads ranged from 83 percent to 90 percent, 

with an overall average of 87 percent. The daily percentage of compliance with the Exchange’s 

one-minute timing standard for outright trades ranged from 85 percent to 91 percent, with an 

overall average rate of 88 percent. However, the daily percentage of compliance with the 

Exchange’s one-minute timing standard for intra-commodity spread transactions was 

significantly lower, ranging from 69 percent to 86 percent, with an overall average rate of 78 

 

ClearPort to clear off-exchange transactions. 
11

percent. 

To enforce the requirement that pit cards be timely submitted and to ensure the accuracy 

of one-minute trade times, Compliance assesses the pit card timing accuracy of all trading 

members for outright trades on a monthly basis. Members with compliance rates below 80 

percent are subject to warning letters and graduated sanctions.11 During the target period, the 

Exchange levied 26 fines of $5,000, 21 fines of $2,500, 31 fines of $1,000, 25 fines of $750, 39 

fines of $500, and 51 fines of $250, for a total of $264,500, and issued 332 warning letters. 

Compliance also forwarded one investigation to the BCC for further action.12 In addition, in 

order to determine if late pit cards may implicate any type of trade practice violation, the 

Compliance Department periodically initiates trade practice inquiries or investigations into the

trading activities of members who consistently fail to meet the 80 percent threshold. Six such 

investigations were opened during the target period.13 

In an effort to reduce pit card timing violations and recidivism by members, the 

 

11 Compliance issues warning letters for the first three monthly failures to meet the threshold by brokers whose total 

number of transactions (sales) was 100 or greater. For subsequent offenses, progressively increasing fines are 

imposed. A member is cited each month his or her audit trail percentage falls below 80 percent. However, a 

member who experiences a four-month violation-free period will be granted a clean slate for purposes of a 

subsequent offense. The fine schedule is as follows: $250 for the first failure to meet the threshold following the 

third warning letter; $500 for the next violation; $750 for the next violation; $1,000 each for the next three 

violations; $2,500 each for the next three violations; and $5,000 each for the next three failures to meet the 80 

percent threshold. Every fourth $5,000 fine will result in a referral to the BCC with a recommendation that a 

complaint be issued for violation of Exchange Rule 8.55(B)(8), “To Fail Consistently to Conform to Audit Trail 

and/or Trade Submission Standards,” a minor offense, and Floor Rule 6.10(A), “Reporting of Trades Executed on 

the Trading Floor.” See September 14, 1998 Notice to Members and May 22, 2001 Notice to Members attached as 

Appendix 2. 

12 Investigation 06-396. This case was settled after the target period with the respondent agreeing to pay a $25,000 

fine, of which $20,000 will be suspended if the respondent is not fined for similar violations within a 12-month 

period from the date the settlement became final. 

13 Investigation 06-376 resulted in the issuance of a Compliance warning letter for failure to comply with the 

Exchange’s trading card recordkeeping requirements and Investigation 03-450 was closed with no recommended 

action. Investigations 06-372, 06-448, 06-449, and 06-478 remained ongoing at the close of the target period. Since 

that time, Investigation 06-449 was closed with a Compliance warning letter, and Compliance has recommended 

charges in Investigation 06-372 for three instances of trading ahead of customer orders. Investigation 06-448 and 

06-478 were still open as of July 7, 2004. 
12

Compliance Department recently developed a program to educate the floor population regarding 

the Exchange’s audit trail requirements and procedures. As part of this program, the Associate 

Compliance Counsel conducts periodic classes for members repeatedly fined for late pit card 

submissions. The program’s purpose is to improve NYMEX’s overall audit trail by educating 

members, identifying individual issues, tailoring individual solutions, and providing statistical 

follow-up. Members, as well as their clerks, are encouraged to attend these classes. 

Although the Pit Card Validation Report includes intra-commodity spread transactions as 

well as outright trades in its trade timing accuracy calculations, members are not subject to 

sanctions for non-compliance with respect to one-minute trade timing for spreads.14 The 

Division believes that this may explain why members’ compliance with the Exchange’s oneminute trade timing requirement is significantly lower for spread trades than for outright trades, 

and recommends that spreads be subject to the same trade timing enforcement program utilized 

for outright trades. In this manner, the Exchange’s accuracy rate for spread execution times 

should improve from its current low level of 78 percent. 

C. Recordkeeping: Trading Cards and Order Tickets 

1. Trading Cards 

To evaluate and enforce members’ compliance with the Exchange’s trading card 

recordkeeping requirements, the Compliance Department conducts an annual review of three 

days of original trading cards for each floor member and administers a summary disciplinary 

program.15 Based upon levels of compliance with eight categories of requirements included in a 

 

14 Transcript, p. 46. 

15 Compliance typically selects a target week and examines the trading cards of approximately 55 members, 10-15 

of whom are selected based upon receipt of a warning letter or fine as a result of a previous review. The remaining 

40-45 members are selected from a monthly computer report as part of the effort to assure that each member is 

reviewed at least once annually. 
13

Compliance Department checklist, members are determined to be in “Full Compliance,” 

“Effective Compliance,” or “Not in Compliance.”16

A member with no discrepancies in any of the eight categories would be in Full 

Compliance, a member with a compliance rate of 90 percent or better in categories one through 

three, no more than two violations in category four, and no discrepancies in categories five 

through eight, would be in Effective Compliance, and a member who failed to meet these 

standards would be deemed Not in Compliance. Members found to be in the latter category are 

subject to disciplinary action. Under the Exchange’s summary disciplinary program, the 

Compliance Department issues a warning letter for the first finding of Not in Compliance. A 

second infraction within a 12-month period results in a $100 fine; and a third infraction within 18

months results in a $500 fine. A fourth infraction within 24 months results in a referral to the 

BCC for formal disciplinary action.17 

NYMEX completed 517 of the 577 trading card reviews it initiated during the target 

period. As a result of the 517 completed reviews, Compliance issued 328 Full Compliance 

letters, 77 Effective Compliance letters, and 71 warning letters.18 The Exchange also assessed 

fines totaling $15,300 for trading card infractions. This amount included 28 fines of $100 and 25 

fines of $500.19 In addition, Compliance forwarded four cases to the BCC for formal 

 

16 The eight categories include: 1) time recorded next to the first trade on each card; 2) identification of the open or 

close and marking through unused lines; 3) buys and sells recorded sequentially in chronological order without 

skipping or sharing lines; 4) drawing a single line through erroneous information; 5) using non-erasable ink; 6) cards 

used are maintained by the floor member; 7) cards are used in numerical sequence day-to-day; and 8) cards that are 

not used, or are rewritten by the floor member, are maintained. A copy of the checklist can be found in Appendix 3. 

17 NYMEX Rule 6.90(G). 

18 The Compliance Department also issued 19 warning letters to members for failure to maintain all trading cards, a 

violation of NYMEX Rule 8.50(B). 

19 Three of the $100 fines and nine of the $500 fines were assessed for violations that occurred prior to the target 

period. 
14

disciplinary action.20

The Division examined 36 trading card reviews that resulted in warning letters or fines 

during the target period and the four trading card reviews that were forwarded to the BCC. 

During the course of the 40 reviews, the Compliance Department examined 2,049 trading cards. 

The Division found that the trading card reviews were thorough and completed in a timely 

manner, and that non-compliant members were disciplined in accordance with the Exchange’s 

summary fining schedule. The Division believes that NYMEX has adequate procedures for 

reviewing and enforcing compliance with its trading card recordkeeping requirements. 

2. Order Tickets 

To evaluate member compliance with the Exchange’s order ticket recordkeeping 

requirements, the Compliance Department conducts order ticket reviews and reviews order 

tickets during the course of trade practice investigations. In contrast to trading card reviews, the 

Division found that the Exchange completed relatively few order ticket reviews during the target 

period. 

Order ticket reviews, which are alternated monthly between NYMEX and COMEX 

members, consist of an examination of a minimum of 30 hand-written floor order tickets from 

one “broker group” per month.21 Typically, a broker group is selected for review based upon the 

appearance of the order tickets examined during the course of an investigation.22 Although the 

Exchange selects a representative sample of the broker group’s business for the selected date, 

 

20 Investigation 06-359 was settled and the subject member was fined $2,500. Three of the four disciplinary cases 

remained open at the close of the target period but were subsequently closed. These matters, Investigations 06-430, 

06-457, and 06-456, were settled and each of the respective respondents was fined $1,500. 

21 A broker group on NYMEX is a business entity composed of one or more brokers who execute customer orders 

and are paid their transaction fees collectively through the Automatic Transfer of Money system. 

22 In conducting an investigation, an analyst obtains the member’s trading records for the entire day. If there are 

deficiencies in any of the order tickets that are critical to determining whether a rule violation occurred, the 
15

each member of the group will not necessarily have his or her order tickets reviewed. The floor 

order tickets selected are examined for the required account identification and timestamps. All 

filled or partially filled orders are required to have entry and exit timestamps; unfilled or 

canceled orders are required to have at least the entry timestamp; and orders for which the terms 

have changed are required to have a timestamp which corresponds to the change.23

A branch order ticket review also is initiated bi-monthly.24 Compliance selects order 

tickets associated with one futures commission merchant (“FCM”) and obtains related floor 

order tickets. Compliance then conducts a review similar to that performed for floor order 

tickets for between 10 and 15 corresponding branch order tickets. The Compliance Department 

reviews the branch order tickets to determine if the terms of the orders and customer account 

numbers/designations correspond to those on the floor order tickets. Compliance also compares 

the timestamps on both sets of order tickets to the associated pit card times and time and sales 

prints in order to assure that they all correspond. Broker groups and FCMs found not to be in 

compliance with recordkeeping requirements are subject to disciplinary action. A finding of 90 

percent or better compliance results in no action. During the target period, compliance of 80 to 

89 percent, in either the first or second review, resulted in the issuance of a Compliance warning 

letter, and compliance of 79 percent or below resulted in a BCC warning letter and a follow-up 

review. Compliance of 79 percent or below following the second review resulted in referral to 

 

member’s broker group is automatically issued a warning letter and is scheduled for a full order ticket review. 

23 The analyst uses a detailed checklist that requires that he or she test for, among other things, carbon copies with 

account numbers written in ink, which may indicate that the account number was obtained after the order was filled. 

A copy of a checklist used in these reviews can be found in Appendix 4. 

24 Comparatively few floor order tickets have corresponding branch order tickets. Excluding machine-generated 

order tickets routed via order routing systems, approximately 80 to 90 percent of the orders received on the 

Exchange floor are telephoned directly to floor brokers by customers. As a result, branch order ticket reviews are 

initiated independently of floor order ticket reviews to ensure that an appropriate sample is reviewed. 
16

the BCC for the issuance of a complaint.25

The Exchange completed eight floor order ticket reviews during the target period, 

examining a total of 324 floor order tickets from nine floor brokers. The Exchange found that 

304 of the 324 order tickets examined (94 percent) contained an account identifier and that 296 

of the order tickets (91 percent) contained required timestamps. As a result of the eight floor 

order ticket reviews, one broker group was issued a Compliance warning letter for failure to 

properly time stamp floor order tickets.26 

The Exchange also completed seven branch office order ticket reviews during the target 

period, examining a total of 78 branch office order tickets. All of the tickets had appropriate 

account identification and order terms that corresponded to the associated floor order tickets, and 

74 tickets (95 percent) contained appropriate timestamps. As a result of the branch order ticket 

reviews, Compliance issued two warning letters to two firms. 

The Division’s examination of the Exchange’s order ticket reviews indicated that the 

reviews were thorough and well documented. However, the Division believes that the 

Exchange’s routine bimonthly floor order ticket review does not provide for sufficient coverage 

of the Exchange’s floor broker population. During the target period, the Exchange reviewed 

 

25 Subsequent to the target period, on June 3, 2004, the Exchange adopted NYMEX Rule 8.70, which imposes a 

summary fining schedule for order ticket recordkeeping violations. Under the new rule, after an initial order ticket 

review, the Compliance Department may impose fines corresponding to the following rates of compliance: (1) 89 to 

80 percent - $100, (2) 79 to 70 percent - $250, (3) 69 to 60 percent - $500, and (4) 59 percent and below - $1,000. If 

after a second review an entity fails to achieve a passing compliance rate, the Compliance Department may impose 

fines corresponding to the following rates of compliance: (1) 89 to 80 percent – the amount of the first fine plus 

$100, (2) 79 to 70 percent – the amount of the first fine plus $250, (3) 69 to 60 percent – the amount of the first fine 

plus $500, and (4) 59 percent and below – the amount of the first fine plus $1,000. If after a third review an entity 

fails to achieve a passing compliance rate, the Compliance Department may impose fines corresponding to the 

following rates of compliance: (1) 89 to 80 percent – the amount of the second fine plus $100, (2) 79 to 70 percent – 

the amount of the second fine plus $250, (3) 69 to 60 percent – the amount of the second fine plus $500, and (4) 59 

percent and below – the amount of the second fine plus $1,000. The Compliance Department may, in its discretion, 

refer to the BCC any entity that fails to achieve a compliance rate of 69 percent after a third review. 

26 Another investigation, Investigation 04-354, was to be presented before the BCC for improper account identifiers 

but was closed by the Compliance Department without action after the principal of the broker group retired and 
17

floor order tickets for only nine of its approximately 263 floor brokers in connection with order 

ticket reviews. Although the Division recognizes that the Exchange also reviews orders tickets 

during the course of investigations, the Exchange’s current methodology for conducting floor 

order ticket reviews results in many brokers not being subject to a routine floor order ticket 

review for an extended period of time. It is important to conduct floor order ticket reviews on a 

routine basis not only because they may reveal recordkeeping deficiencies, but also, and more 

importantly, because doing so may identify irregularities on the face of an order that may 

underlie substantive violations, such as alteration of an account number to allocate fills to a 

favored account. Therefore, the Exchange should take appropriate steps to ensure that more 

broker groups and individual floor members are reviewed annually in connection with routine 

order ticket reviews. 

D. Safe Storage Capability 

All NYMEX audit trail data, which includes trade data from the Streetbook and time and 

sales sequencing data, are maintained in TXN, the Exchange’s automated trade surveillance 

system. The Exchange has the ability to access TXN data back to 1998. The Exchange 

maintains these data on two independent dedicated computers, the “production” machine and the 

“hot backup,” which mirrors the production machine. Compliance Department data also are 

stored in both computers and staff can seamlessly switch back and forth between the machines as 

needed. Incremental back-up of data to tape is performed daily and a full back-up to tape is 

performed weekly. Tapes are stored off site at a private storage facility for approximately four 

weeks and then periodically sent to the Exchange’s back-up trading facility located on Long 

Island, New York. The full back-up tapes are maintained for at least seven years and the 

 

dissolved the association. 
18

incremental tapes are recycled after a period of three months. 

E. Conclusions and Recommendations 

The Division found that the Exchange maintains an adequate audit trail program. 

Pursuant to Core Principle 10, the Exchange maintains rules and procedures that provide for the 

recording and safe storage of trade data, time and sales data, and historical transactions in a 

manner that enables the Compliance Department to use the information in its automated 

surveillance system to assist in the prevention of customer and market abuses and to provide 

evidence of any rule violation. In addition, the Exchange retains audit trail data for seven years, 

two years more than the five years required by Core Principle 17. 

The Exchange uses the Pit Card Validation Report to assess the timeliness of pit card 

timestamps that are used to assign one-minute trade times. This report compares pit card times 

to trade times appearing on the time and sales for outright and spread transactions. Members 

with pit card submission timeliness rates below 80 percent for outright trades are subject to 

warning letters and graduated summary fines. However, the summary enforcement program is 

not used to enforce trade timing for spreads. The Division’s review of the Pit Card Validation 

Report for randomly selected days during the target period disclosed that the percentage of 

compliance for spread transactions was 78 percent, significantly lower than the percentage of 

compliance for outright trades, 88 percent, and should be improved. 

The Exchange’s audit trail program also includes annual trading card reviews of each 

floor member and bimonthly order ticket reviews to examine members’ compliance with 

recordkeeping requirements. The Division found that the Exchange’s order ticket and trading 

card reviews were thorough, well documented, and completed in a timely manner. However, the 

Division found that the Exchange’s selection methodology for order ticket reviews does not 
19

provide for sufficient coverage of the Exchange’s floor broker population. During the year-long 

target period, the Exchange reviewed the floor order tickets of only nine of its approximately 263 

floor brokers. The Exchange’s selection methodology, therefore, results in many brokers’ floor 

order tickets not being reviewed for an extended period of time. 

Based on the foregoing, the Division recommends that the Exchange: 

• Include spread transactions in its pit card/one-minute trade timing summary 

enforcement program. 

• Increase the number of broker groups and individual floor brokers reviewed 

annually in routine floor order ticket reviews to a level that would ensure that a 

sample of each broker’s floor order tickets are subject to examination within a 

reasonable period of time. 
20

IV. TRADE PRACTICE SURVEILLANCE PROGRAM 

Core Principle 2 – Compliance with Rules: 

The board of trade shall monitor and enforce compliance with the rules of the 

contract market, including the terms and conditions of any contracts to be traded 

and any limitations on access to the contract market. 

 Core Principle 12 – Protection of Market Participants: 

The board of trade shall establish and enforce rules to protect market participants 

from abusive practices committed by any party acting as an agent for the 

participants. 

Pursuant to Appendix B to Part 38 of the Commission’s regulations, a contract market’s 

trade practice surveillance program should have the arrangements, resources, and authority 

necessary to perform effective rule enforcement. The arrangements and resources attendant to 

the program should facilitate the direct supervision of the contract market, including analysis of 

relevant data. An acceptable program should have systems that maintain all data reflecting the 

details of each transaction executed on the contract market. In this regard, the program should 

include routine electronic analysis of these data to detect potential trading violations. The 

program also should provide for appropriate and thorough investigation of all potential trading 

violations brought to the contract market’s attention, including member and Commission 

referrals and customer complaints. In addition, the program should have the authority to 

discipline, suspend, or terminate the activities of members or market participants pursuant to 

clear and fair standards.27

 

27 That aspect of Core Principle 2 that relates to the disciplining of members who violate Exchange rules is discussed 

below in Section V. This section of the report addresses the Exchange’s program for monitoring its markets for 

possible trading abuses and the investigation of any identified abuses. 
21

A. Compliance Staff

The Compliance Department, whose staff is responsible for detecting, investigating, and 

prosecuting potential trading violations on both the NYMEX and COMEX Divisions, is directed 

by the Senior Vice President of Compliance and Risk Management.28 The Vice President of 

Compliance assists the Senior Vice President in the day-to-day management of the Exchange’s 

trade practice and market surveillance programs, and is responsible for the Compliance 

Department’s legal program, which includes a Compliance Counsel and an Associate 

Compliance Counsel.29

The Director of Trade Practice Surveillance has overall responsibility for investigating 

and prosecuting rule violations.30 The Director manages a trade practice staff that includes an 

Associate Director, four senior managers, one manager, six analysts (including one senior 

analyst and two experienced analysts), and one clerk. The Associate Director and managers 

oversee investigations and provide general guidance to the analysts and clerk.31 The analysts 

review trading activity and trading documents, analyze computerized exception reports, conduct 

 

28 The Senior Vice President of Compliance and Risk Management, who has been with the Exchange for 17 years, is 

responsible for the Exchange’s trade practice surveillance, market surveillance, and risk and financial management 

programs. He began his Exchange career in the market surveillance area and previously served in the positions of 

Director of Market Surveillance and Vice President of Compliance. 

29 The Vice President of Compliance has more than 15 years of exchange experience. She served as COMEX 

Compliance Counsel from 1989 until 1994, when COMEX merged with NYMEX, and was then named as NYMEX 

Associate Compliance Counsel. In 1998, she was promoted to Compliance Counsel and held that position until 

December 2002, when she was promoted to her current position. The Compliance Counsel, who is responsible for 

prosecuting trade practice violations, has significant industry experience that includes seven years as a 

COMEX/NYMEX investigator, two years as an attorney with the Commission’s former Division of Trading and 

Markets, and two years as Vice President of Compliance and Compliance Counsel for an FCM. He has been in his 

current position for 15 months. 

30 The Director of Trade Practice Surveillance is a former COMEX floor trader. He has worked for the Exchange 

for the past 11 years and has held his present position for the past six years. 

31 NYMEX’s trade practice surveillance staff has significant exchange and industry experience. The Associate 

Director, who has 21 years of combined COMEX/NYMEX experience started as a COMEX investigator in 1983 

and was a manager at the time of the NYMEX/COMEX merger. He has served in his present position since 2001. 

One of the senior analysts and one of the analysts are former NYMEX or COMEX members. In addition, the senior 

analyst spent 11 years clerking on the trading floor prior to his Exchange employment. 
22

floor surveillance, and investigate potential rule violations. The clerk performs administrative 

functions and conducts certain audit trail review procedures. The Exchange’s trade practice 

surveillance staff also includes a project coordinator, one trade practice secretary, and one 

administrative assistant. 

Investigations are assigned to analysts based on managers’ assessments of analysts’ 

workloads and experience. In addition, analysts are assigned both NYMEX and COMEX 

investigations. Rather than being assigned to a particular manager, analysts rotate to all types of 

assignments and work with all of the managers on a rotating basis in order to learn from the 

particular expertise and experience of each of the various managers. However, analysts may be 

assigned to specific markets, either to support ongoing investigations or to address current 

market conditions.32

The Exchange appears to have adequate staffing levels to monitor its markets. 

B. Electronic Surveillance 

As stated earlier, TXN is the Exchange’s computerized surveillance program used to 

detect possible trading violations, and to assist in the investigation of trade practice abuses for 

both open outcry and ACCESS trading. TXN is a flexible system that permits analysts to select 

default parameters in order to create customized reports that focus on particular types of trading 

violations, members, or suspected patterns of violations. TXN provides two standardized 

surveillance screens, the trading ahead and prearranged trading reviews, that are reviewed daily 

by analysts. The trading ahead program displays instances where a broker appears to have traded 

ahead of either his or her own customer order or the customer order of an associated broker. The 

prearranged trading report displays instances where a broker may have directly or indirectly 

 

32 Transcript at p. 9. 
23

taken the opposite side of either his or her customer order or the customer of an associated 

broker. Both reports display any potentially profitable offsetting trades for each displayed 

exception. 

In addition to the standardized daily screens, Compliance Department staff uses TXN’s 

“Analysis” functionality, which provides pattern recognition capability. Analysis detects 

patterns of trading activity for one or more brokers that suggest possible abusive practices with 

respect to trading ahead, prearranged trading, and “fairness” of fill prices.33 Analysis examines 

all cleared data quarterly and calculates the number of times that sequences of trades involving 

the same brokers present similar sets of fact patterns. Collections of such fact patterns that are 

statistically significant from a trade practice surveillance perspective are grouped by TXN into 

“leads.” Thus, leads suggest trading relationships between brokers statistically based on the 

patterns of trading in which they appear to be engaged. 

In addition to the quarterly generation of leads, Analysis examines each day’s trading 

activity to determine if any new trades fit the pattern identified in the lead. If they do, a tally is 

presented in a summary screen to show the analyst that the identified pattern appears to be 

continuing. Compliance staff can refer to leads during the course of daily reviews, as well as in 

connection with inquiries and investigations, to determine whether expansion of the inquiries or 

investigations to include other relevant parties and patterns is warranted. Analysts also open 

inquiries and investigations based upon leads.34 

 

33 “Fairness” is a specific type of trade event analysis that looks at the difference between the price at which a trade 

occurred and the prices of adjacent trades. This analysis helps analysts identify situations where one broker may be 

getting an advantage on trades over other brokers, indicating that the broker may be involved in a relationship with 

one or more members that results in profits. 

34 The distinction between an inquiry and an investigation is that the latter involves a request for documents that are 

not already under the control of the Exchange. In an inquiry, only documents available through Exchange sources 

including, among other things, the Streetbook, time and sales, and pit cards are reviewed. 
24

Since the Division’s last rule enforcement review of NYMEX’s trade practice programs 

in 2000 (“2000 Review”), the Exchange has developed several new TXN applications and 

programs, including: (1) “High/Low Open/Close Streetbook”- a Streetbook viewer that extracts 

trades executed at the high and low of the day and/or the high or low of any specific time period, 

such as the open or close; (2) “E-miNY Applications”- programs developed to monitor e-miNY 

contracts traded on the Chicago Mercantile Exchange’s GLOBEX platform;35 (3) “PJM 

Electricity”- programs developed to monitor permittee trading in PJM electricity;36 (4) “Spread 

Trades Viewer”- an application to conduct spread queries that match up individual legs of a 

spread transaction; (5) “Trade Sequencing for Trading Ahead”- a mathematical algorithm that 

assigns a probability to each trading ahead exception identified on the daily trading ahead report 

based on time and sales;37 (6) “Profit and Loss Hedge Index”- a program that monitors day 

trading accounts for fraudulent trading activity; and (7) “Fast Match” - an application to identify 

illegal cross trades entered on ACCESS.38 In addition, staff has access to a non-TXN software 

application, “Business Objects,” to assist in the review of ACCESS trading. Business Objects 

includes log-on, terminal user, and other information such as allocation and time of order entry 

 

35 NYMEX’s e-miNY contracts are 50 percent of the size of NYMEX’s standard-size contracts and trade virtually 

around the clock on the Chicago Mercantile Exchange’s GLOBEX electronic trading platform and clear through the 

NYMEX clearinghouse. The only e-miNY contracts currently trading are the Henry Hub Natural Gas futures and 

Light Sweet Crude Oil futures. 

36 NYMEX began trading the PJM Electricity contract in April 2003, and has licensed nonmember permitees 

meeting certain financial requirements to trade the contract on the Exchange floor. The PJM electricity permittees 

also are authorized to place orders with members in Natural Gas in order to execute a “spark spread” transaction 

between PJM Electricity and Natural Gas. The PJM Electricity TXN applications monitor permittee floor trading to 

ensure that they are not violating any Exchange rules. 

37 The daily trading ahead program identifies all trades executed by a broker ahead of a customer order within a 

three-minute window. TXN’s Trade Sequencing for Trading Ahead application compares each trading ahead 

exception to time and sales prints and assigns a probability that assists analysts in determining which exceptions 

should be pursued further. For example, the Trade Sequencing for Trading Ahead application may find that based 

on time and sales, the only time that the broker could have executed a personal trade was after the customer order. 

The algorithm then would assign a zero probability to the exception. 

38 NYMEX Rule 6.40A requires that an electronic trader or a NYMEX ACCESS operator allow an order to rest in 
25

that is not typically available on TXN.39 

C. Floor Surveillance 

Compliance Department staff routinely observes trading in each contract market on the 

open and close, at a random time during the trading day, and when special market conditions 

warrant. Among other things, floor surveillance is used to determine the physical location of 

members relative to other members and to determine members’ affiliations with other members; 

to document various floor trading practices; to identify trading patterns that are unusual for 

particular members; and to deter trading abuses, such as noncompetitive trading and trading 

before the open or after the close. 

Two analysts are assigned to observe the opening, one analyst is assigned to observe the 

markets for at least 20 minutes during the middle of the day, and all analysts who are available 

observe the daily close. Analysts also routinely perform floor surveillance as part of the 

investigative process for cases to which they are assigned. Floor surveillance observations are 

recorded in the “Weekly Floor Surveillance Log.”40 The Division’s review of the log disclosed 

that floor surveillance was conducted in accordance with the Exchange’s schedule. During the 

target period, one inquiry and three investigations into possible trade practice violations were 

opened based on floor surveillance observations.41

 

the system for at least 10 seconds before crossing that order. 

39 The Business Objects application is maintained by the NYMEX Customer Service Call Center (“NCSCC”). 

40 Sample copies of the Weekly Floor Surveillance Logs can be found in Appendix 5. 

41 The inquiry and three investigations opened from floor surveillance involved allegations of prearranged trading. 

Inquiry 89-03, which was subsequently converted into Investigation 04-429, was opened based on staff’s hearing of 

a conversation between two phone clerks concerning the prearrangement of a natural gas trade. Investigation 04-

431 was opened based on staff’s observation of a member negotiating trades before the Exchange’s “post-close” 

session. Investigation 04-357 was opened based on observation of activity among a group of members prior to the 

beginning of the closing period. Investigation 04-429 was closed after the target period with no action. 

Investigation 04-431 currently is pending with the BCC and the Compliance Department is preparing an 
26

D. Adequacy of Investigations 

During the target period, the Exchange opened 109 investigations generated from a 

variety of sources including direct review of TXN screens and the Streetbook (46), floor 

surveillance (three), floor order ticket and branch office order ticket reviews (13), referrals from 

other Exchange departments (22), Division referrals (four), customer complaints (11), and 

member and anonymous complaints (10). The potential violations identified included, among 

other things, trading ahead of customer orders, prearranged and noncompetitive trading, 

improper cross trades, misallocation of fills, and unauthorized trading. 

To evaluate the adequacy of the Exchange’s investigations, the Division examined all of 

the 105 investigations closed during the target period. Of those 105 closed investigations, 20 

resulted in the referral of members to the BCC for disciplinary action. Forty-four investigations 

resulted in the issuance of 74 Compliance warning letters, three investigations resulted in the 

issuance of five advisory letters, one resulted in a verbal warning, and 37 investigations were 

closed with no further action recommended. 42

The Division found that the Exchange conducted thorough, well-documented 

investigations and made appropriate analyses. Investigation files contained underlying trading 

documents, reconstructions of trading sequences, cassettes of tape-recorded interviews, 

correspondence, computer reports, and investigation and activity logs. The Division also found 

that closeout sign-off sheets and closeout memoranda prepared for investigations closed with no 

further action or for which Compliance warning letters were issued adequately explained 

 

investigation report to refer Investigation 04-357 to the BCC for disciplinary action. 

42 An advisory letter reminds a member of Exchange rule provisions that may apply to a member’s conduct and 

serves to put a member on notice that the Exchange views certain actions as potential rule violations. Unlike a 

warning letter, the fact that an advisory letter has been issued will not be relayed to a disciplinary committee during 
27

Compliance staff’s rationale and were supported by proper analyses. Similarly, investigation 

reports for matters forwarded to the BCC for disciplinary action included detailed analyses of the 

violative trades and supporting evidence, and clearly articulated staff’s conclusions and 

recommendations. The Division also found that investigations were expanded in scope to 

include additional trading activity and members, as appropriate. 

During the target period, the Exchange set a goal of closing its aged investigations and 

reducing the average age of its open investigations to less than one year. In this regard, the 105 

investigations closed by the Exchange during the target period included 16 investigations that 

had been open for more than a year.43 Thirteen of these investigations were referred for 

disciplinary action and Compliance warning letters were issued in connection with the remaining 

three investigations. The Exchange explained that the delay in closing the older cases was due to 

several factors including, among other things, extreme volatility in the natural gas market that 

resulted in difficult and time consuming investigations; Compliance staff involvement in 

addressing a series of anonymous complaints, some involving individuals who already were the 

focus of ongoing investigations; and changes within the trade practice group that resulted in the 

reshuffling and reassignment of investigations. Further, several of the investigations required 

numerous trade reconstructions and/or requests for and review of additional trading documents, 

and required numerous drafts of investigation reports.44 By the end of the target period in 

December 2003, there were no investigations on the Exchange’s log open for more than one 

year.

 

a subsequent case. 

43 The 16 investigations included 12 that had been open for more than one year and four that had been open for more 

than two years. 

44 See Transcript, pp. 14-22. 
28

E. Conclusion and Recommendations 

The Division found that the Exchange maintains an adequate trade practice surveillance 

program administered by an experienced staff. Compliance staff conducts floor surveillance on a 

daily basis and uses TXN, a sophisticated computerized trade surveillance system, to detect and 

investigate potential trade practice violations. During the target period, the Exchange closed 105 

investigations, 20 of which were referred for disciplinary action. The activity examined 

included, among other things, trading ahead of customer orders, prearranged and noncompetitive 

trading, improper cross trades, misallocation of fills, and unauthorized trading. The Division 

found that investigations were thorough and well documented. Sign-off sheets, closeout 

memoranda, and investigation reports included sufficient analyses to support Compliance staff’s 

conclusions. In addition, investigations were expanded in scope and/or time to include 

additional trading sequences and members where appropriate. During the target period, the 

Exchange focused on closing older investigations. By the end of the target period, there were no 

investigations on the Exchange’s log open for more than one year. 

Based on the foregoing, the division has no recommendations in this area.
29

V. DISCIPLINARY PROGRAM 

Core Principle 2 - Compliance With Rules: 

The board of trade shall monitor and enforce compliance with the rules of the 

contract market, including the terms and conditions of any contracts to be traded 

and any limitations on access to the contract market. 

 Core Principle 2 requires that exchanges take effective disciplinary action whenever a 

rule violation is suspected. Disciplinary actions must be prompt and conducted pursuant to clear 

and fair standards. Exchanges must have the authority to discipline, suspend, or terminate the 

activities of members or market participants found to have committed rule violations. 

A. Disciplinary Committees and Procedures

1. The Business Conduct Committee 

NYMEX has two primary disciplinary committees, the BCC and the Adjudication 

Committee.45 The BCC’s principal function is to determine if a reasonable basis exists for 

finding that a rule violation occurred. It consists of a Chairman, nine Committee members, and 

four alternates. The Chairman selects the members and alternates, subject to the Board of 

Directors’ approval. The BCC must include at least one non-member, and must be balanced 

among floor brokers, locals, commercials, and FCMs. During the target period, 30 percent of the 

members of the BCC were required to be COMEX members.46 

As noted earlier, the Exchange’s Compliance Department investigates possible rule 

violations and prepares a formal investigation report if it concludes that there is a reasonable 

basis to believe that a rule violation has occurred.47 Once an investigation report is completed, it 

 

45 During the target period, the Adjudication Committee was divided into 4 panels, two for NYMEX matters and 

two for COMEX matters. Similarly, there were two BCC panels during the target period. NYMEX Rules 3.10 and 

3.13. 

46 NYMEX Rules 3.10 and 3.13. 

47 NYMEX Rules 8.00 and 8.01. 
30

is served on the respondent(s). Respondents have five business days to submit a response to 

Compliance, which then forwards the report and any responses to the BCC. Typically, the BCC 

panel considering the matter meets five business days after receiving the investigation report.48 

Compliance staff is present during the panel’s review of the investigation report. Respondent(s) 

who have submitted a response may personally appear before the panel after Compliance’s 

presentation of the report and before the panel’s deliberations. If the BCC concludes that a 

reasonable basis exists for finding that a Rule violation occurred, it may issue a Complaint. In 

the alternative, the BCC may return the matter to Compliance with instructions for further action, 

or it may issue a warning letter.49

 At any time prior to the submission of an investigation report to the BCC, the respondent 

and Compliance may negotiate and enter into a written settlement agreement, subject to BCC 

approval.50 Likewise, concurrent with its review of an investigation report, the BCC may 

approve a settlement agreed upon by Compliance and the respondent (“Joint Offer of 

Settlement”) or a settlement submitted by the respondent only (“Unilateral Offer of Settlement”). 

The BCC may also entertain Joint and Unilateral Offers of Settlement after a Complaint has been 

issued, but prior to service of the Complaint on the Chairman of the Adjudication Committee.51 

 

48 Transcript, pp. 194-195. 

49 NYMEX Rule 8.02. 

50 The settlement offer may provide for a cease and desist order, a censure, an order directing restitution to any 

injured person, and a fine not exceeding $5,000 for each Rule violation alleged. NYMEX Rule 8.03(A). 

51 Joint and Unilateral Offers of Settlement may provide for a cease and desist order, a censure, an order directing 

restitution to any injured person, a fine not exceeding $25,000 per each alleged rule violation, and expulsion or 

suspension from all or some membership rights and privileges for a period not to exceed three months for each Rule 

violation alleged. See NYMEX Rule 8.03(B), (C), and (D). 
31

2. Adjudication Committee

The Adjudication Committee consists of a Chairman and two panels, each of which has 

ten members and an unspecified number of alternates.52 The Chairman selects the members and 

alternates, subject to the Board of Directors’ approval. Each panel of the Committee must 

include at least one non-member, and must be balanced among floor brokers, locals, 

commercials, and FCMs. With respect to major disciplinary actions, more than 50 percent of an 

Adjudication Committee panel must be comprised of persons representing membership interests 

other than that of the respondent.53 

Upon receiving a Complaint, the Adjudication Committee Chairman assigns it to one of 

the two NYMEX hearing panels. The hearing panel to which the case is assigned will adjudicate 

the case and the other hearing panel, hereinafter referred to as the “settlement panel,” will 

evaluate any settlement offers made from this point forward. At any time after a Complaint is 

filed with the Chairman of the Adjudication Committee, respondents may submit Unilateral 

Offers of Settlement to the settlement panel. The Compliance Department may recommend that 

the panel approve or reject the settlement offer.54 Likewise, Compliance and respondent may 

submit a Joint Offer of Settlement. All BCC and Adjudication Committee settlements are 

subject to approval by the Exchange’s Board of Directors.55 

 

 

52 NYMEX Rule 3.10. 

53 “Major disciplinary actions” include those brought for any violations of the rules except those rules related to 

decorum or attire; financial requirements; or reporting or recordkeeping. NYMEX Rules 3.03(A)(5)(i) and 

3.11A(D)(f)(ii). 

54 Adjudication Committee settlement offers may provide for a cease and desist order, a censure, an order directing 

restitution to any injured person, a fine not exceeding $1,000,000 for each rule violation alleged, and expulsion or 

suspension from all or some membership rights and privileges. NYMEX Rule 8.08(A). 

55 NYMEX Rules 8.03(E) and 8.08(B). 
32

B. Adequacy of Sanctions

During the target period, the Exchange took final disciplinary action against 16 members, 

one member firm, and one clearing member firm in 16 separate cases.56 All of the disciplinary 

cases were resolved through Adjudication Committee settlement agreements. The settlement 

agreements resulted in fines totaling $2,718,500 (one fine accounted for $2,500,000), five 

suspensions, and three instances of customer restitution totaling $27,510. 

The Division found that the sanctions imposed in the majority of the 16 cases appeared 

reasonable relative to the violations committed. For example, Docket No. 03-03, a market 

surveillance investigation with trade practice elements, resulted in a $2,500,000 fine assessed 

against a NYMEX clearing member for, among other things, position limit violations and wash 

trading. The Division believes that this case is noteworthy for the efficiency with which it was 

handled, and for the meaningful sanction imposed. It includes not only a substantial monetary 

penalty, but also the requirement that the clearing member develop written procedures to prevent 

a repetition of the violations that took place. 

Of the remaining 15 cases finalized during the target period, 11 involved trade practice 

violations and four involved recordkeeping violations. The 11 trade practice cases, involving 14 

members, resulted in five suspensions, three instances of customer restitution, and $208,000 in 

fines. Two of the 11 cases involved ACCESS trading. 

The most notable sanctions include a $25,000 fine, three-week suspension, and $25,350 

in restitution assessed against a single member to settle two Complaints alleging noncompetitive 

trading, prearranged trading, dishonest conduct, false testimony to the Exchange, fraud or bad 

faith, and other violations. A second respondent in one of these cases was assessed a $10,000 

 

56 Two respondents appeared each in two separate cases. One settled his two cases independently, the other settled 
33

fine and $750 in restitution. 

Another substantial trade practice sanction was a $60,000 fine against one member and a 

$25,000 fine and one-week suspension against another member in a single case alleging 

noncompetitive and prearranged trading. Similar allegations resulted in a two-year suspension 

and a deferred $5,000 fine against a member in one case, and fines of $30,000 and $20,000 

against two members in two other cases. Finally, a trade practice case originating from a 

Division referral resulted in a $5,000 fine, one-week suspension, and $1,450 in restitution for 

trading ahead of customer orders. 

The Exchange also assessed a total of $5,500 in fines in three cases involving members 

who committed a fourth infraction of the Exchange’s trading card rules. In addition, a $5,000 

penalty was assessed in a single case against a member who failed to submit his pit cards in a 

timely manner. 

Although the Division found that the sanctions imposed in a majority of the 16 cases 

finalized during the target period appear reasonable relative to the violations committed, the 

Division also found five cases with which it is concerned. In each of these cases, the 

Adjudication Committee did not follow Compliance staff’s recommendations for more 

substantial sanctions, sometimes with respect to repeat offenders. Some cases raise concerns as 

to the adequacy of the sanctions imposed by the Adjudication Committee. In addition, in two of 

the five cases, restitution was calculated and recommended by Compliance, but was not included 

in the final settlements.57 

In Docket No. 02-17, which involved violations of NYMEX Rule 6.22(E): Acceptance of 

 

his cases through a single settlement agreement. 

57 In its 2000 Rule Enforcement Review, the Division recommended that the Exchange “order restitution in all 
34

Orders for Entry Into NYMEX ACCESS, the Complaint charged that, in 30 instances relating to 

19 bunched orders for multiple accounts, the respondent firm temporarily placed trades in a 

holding account belonging to its largest ACCESS customer and later reallocated the trades, albeit 

correctly, to various accounts at different clearing members. The respondent and Compliance 

staff agreed to a Joint Offer of Settlement in which the respondent would pay a $5,000 fine. 

However, despite the pre-existing settlement between the respondent and Compliance, 

the Adjudication Committee settlement panel determined to lower the respondent’s fine to 

$2,500. Senior Compliance staff expressed their “strong disagreement” with the panel’s 

decision, explaining that a $5,000 fine was appropriate since the respondent had been given 

numerous warning letters, thereby escalating the severity of the violation.58 The Committee 

minutes state that the panel lowered the fine because the Complaint made no mention of warning 

letters issued to the respondent. However, this appears to be incorrect, as the Complaint did 

indicate that a warning letter was previously issued, stating: “In November 2001, Staff reviewed 

[respondent’s] procedures for entering orders into NYMEX ACCESS on various trade dates in 

November 2001 and issued a Staff Warning Letter for failing to comply with NYMEX Rule 

6.22(E).” Indeed, the case before the Adjudication Committee arose as a follow-up to the 

November 2001 review and Staff Warning Letter. 

 

settlements and Exchange disciplinary actions where the amount of customer harm can be determined.” 

58 Adjudication Committee Minutes, NYMEX Panel A, April 3, 2003. 
35

In Docket No. 01-10, the respondent was referred to the BCC for repeated violations of 

NYMEX Rule 6.90(D), which requires a seller to submit a pit card within one-minute of each 

transaction. Members with less than an 80 percent compliance rate are subject to warning letters, 

escalating summary fines, and referral to the BCC for formal disciplinary action.59 In this case, 

the respondent, a crack spread trader with a long record of Rule 6.90(D) violations, was referred 

to the BCC after receiving multiple warning letters and paying $35,500 in 11 summary fines for 

the 16-month period from September 1999 to December 2000. Subsequent to the Complaint 

being issued in May 2001, but prior to its settlement in June 2003, the respondent continued to 

violate Rule 6.90(D), failing to meet the 80 percent standard six times in 2001 and eight times in 

2002. Since 1995, the respondent has paid approximately $100,000 in fines for failure to comply 

with Rule 6.90(D).60 

The respondent offered to settle Docket No. 01-10 with another $5,000 fine. Compliance 

opposed the offer, citing the “exceptionally repetitive” nature of the respondent’s violations. 

Compliance recommended instead a $25,000 fine, with $20,000 suspended if the respondent 

complied with Rule 6.90(D) for a six-month period. Nevertheless, the Adjudication Committee 

settlement panel approved the respondent’s $5,000 Unilateral Offer of Settlement. 

In another case, Docket No. 02-13, involving two instances of non-competitive and 

prearranged trading, failure to provide original trading cards to Compliance, and failure to adhere 

to a prior cease and desist order, Compliance recommended a one-week suspension and a $7,500 

 

59 See footnote 11 for a complete description of the summary fine schedule. 

60 During the target period, the respondent was also charged with violating NYMEX Rule 6.90(B), which, among 

other things, requires that members indicate the time of execution next to the first transaction on each trading card. 

The Complaint in Docket No. 02-14 alleged that respondent failed to indicate the time of execution next to the first 

transaction on 53 of the 54 trading cards reviewed by Compliance. It also alleged that respondent failed to mark 

through unused lines in two instances, and failed to identify the open and/or close in 15 instances. The respondent 

settled these charges with a $1,500 fine. Similar infractions resulted in the respondent receiving a warning letter in 

July 2000, a $100 fine in December 2000, and a $500 fine in May 2001. 
36

fine. In addition, the investigation report that supported the Complaint stated that “there is a 

reasonable basis to believe that [respondent] and [counterparty] changed the price on a 

completed trade to the detriment of [respondent’s] customer....[T]he price change...resulted in 

damage to [respondent’s] customer in the amount of $920.” The settlement panel, however, 

accepted the respondent’s Unilateral Offer of Settlement for a two-day suspension and a $5,000 

fine. The panel did not include restitution in the final settlement. 61 

Likewise, in Docket No. 03-06, which involved 84 instances of making or reporting of 

false or fictitious trades and engaging in wash trading in ACCESS contracts, Compliance sought 

a one-week suspension, a $5,000 fine, and a cease and desist order.62 The settlement panel, 

however, accepted the respondent’s Unilateral Offer of Settlement, agreeing to no suspension, a 

$2,500 fine and a cease and desist order. 

Finally, in Docket No. 03-02, Compliance recommended a one-week suspension, a 

$7,500 fine, and restitution against two floor members for engaging in non-competitive, 

prearranged trading, and indirectly taking the opposite side of customer orders. Compliance 

determined that the customer was disadvantaged by $998. The customer’s loss was included in

the investigation report and the Complaint, and was raised before the settlement panel. In the 

final settlement, however, the panel lowered the fines against each respondent by $1,000, did not 

suspend either member, and did not order restitution to the aggrieved customer.63 In the majority 

 

61 In 1999, facing similar charges, the respondent was sanctioned with a two-week suspension and a $7,500 fine. 

The Division notes that under NYMEX rules, such violations require suspension in the absence of mitigating 

circumstances. Specifically, NYMEX Rule 8.55 states that “unless good cause is shown, any offense involving 

fraudulent or deceitful trading practices detrimental to a customer’s order...shall be punishable, at a minimum with a 

suspension or revocation of the Member’s...right to execute customer orders.” 

62 Of the 84 instances, 65 involved trades of one contract in size, and the remaining 19 involved trades between two 

and 10 contracts. The member made no profit on any of this activity and no customer orders were involved. 

Compliance’s recommendation was based, in part, on the fact that the member’s only apparent goal was to create the 

appearance of activity to generate interest in an otherwise slow market. 

63 NYMEX Rule 8.55 is relevant here as well. See footnote 61. 
37

of the above cases, the Adjudication Committee meeting minutes were silent with respect to the 

Committee’s rationale for not following Compliance’s recommendations. 

C. Timeliness of Disciplinary Process

The Division found that, with one exception, the disciplinary cases were handled in a 

timely manner. In 14 of the 16 cases settled during the target period, the BCC issued a 

Complaint less than 90 days after receiving Compliance’s investigation report, including eight 

cases in which Complaints were issued within 30 days and four cases in which complaints were 

issued within 60 days. In addition, 13 of the 16 cases were settled within approximately six 

months of the issuance of a Complaint, and two additional cases were settled within one year.64 

Further, all settlements were submitted to the Board of Directors for final approval in a timely 

fashion, and all fines owed have been collected. 

D. Conclusions and Recommendations

During the target period, the Exchange took final disciplinary action in 16 cases, all of 

which were resolved through settlement agreements at the Adjudication Committee. The 

Division found that the sanctions imposed in the majority of the 16 cases appear reasonable 

relative to the violations committed. The settlement agreements resulted in fines totaling 

$2,718,500, including a $2,500,000 fine in a market surveillance case with trade practice 

elements. Eleven of the 16 cases involved trade practice violations, where sanctions reached as 

high as a $25,000 fine, three-week suspension, and $25,350 in customer restitution in a 

settlement resolving two Complaints against one member. The single largest trade practice fine 

 

64 The lone exception was Docket No. 01-10, discussed above, where approximately two years passed from the time 

the BCC issued the Complaint to the time the Adjudication Committee accepted the respondent’s Unilateral Offer of 

Settlement. The delay was caused in part by the events of September 11, 2001. In addition, the Exchange gave the 

respondent more than a year to attempt to improve his compliance with the one-minute trade-timing rule before 

proceeding with the disciplinary action against him. 
38

was $60,000. Four of the 16 cases finalized during the target period involved recordkeeping 

violations, where sanctions ranged from $1,500 to $5,000. 

At the same time, the Division identified five cases with which it is concerned. In each 

of these cases, the Adjudication Committee did not follow Compliance staff’s recommendations 

for more substantial sanctions, sometimes with respect to repeat offenders. Some cases raise 

concerns as to the adequacy of the sanctions imposed by the Adjudication Committee. In 

addition, in two of the five cases, restitution was calculated and recommended by Compliance, 

but was not included in the final settlements. 

Based on the foregoing, the Division recommends that: 

• Exchange disciplinary committees should give careful consideration to 

Compliance staff’s recommended sanctions, and, in those instances where the 

committees’ sanctions ultimately differ from those recommended by 

Compliance, the committees should articulate their rationale in committee 

minutes. 

• Exchange disciplinary committees should ensure that all sanctions and 

settlements are sufficient to serve as an effective deterrent, particularly in those 

cases involving repeat offenders. 

• Restitution should be ordered in settlements and Exchange disciplinary decisions 

where the amount of customer harm can reasonably be determined. 
39

VI. DISPUTE RESOLUTION PROGRAM

 Core Principle 13 - Dispute Resolution 

The board of trade shall establish and enforce rules regarding and provide facilities 

for alternative dispute resolution as appropriate for market participants and any 

market intermediaries. 

Pursuant to acceptable practices set forth in Appendix B to Part 38, an exchange is 

required to provide customer dispute resolution mechanisms that are fair, equitable, and available 

on a voluntary basis. Customers should have the opportunity to have their claims heard and 

decided by an objective and impartial decision maker. In addition, each party should have the 

right to counsel, adequate notice of claims presented against him or her, and an opportunity to be 

heard on all claims, defenses, and counterclaims. The process should provide for a prompt 

hearing, as well as prompt, written, final settlement awards that are not subject to appeal within 

the exchange. The parties also should be notified of the fees and costs that may be assessed. 

Finally, if an exchange provides procedures for the resolution of member-to-member disputes 

(not involving customers), the procedures for resolving such disputes must be independent of, 

and not interfere with, the resolution of customers’ claims or grievances. 

A. Customer Arbitration

Exchange customers are afforded voluntary dispute resolution through procedures set 

forth in NYMEX Rules 5.01 through 5.38. Matters subject to arbitration include any claim or 

grievance between a customer and a member or an employee of a member or member firm that 

arises as a result of any transaction on or subject to the rules of the Exchange. If two years or 

more have passed since the event that gave rise to the claim or grievance, the matter may no 

longer be arbitrated.65 

 

65 NYMEX Rules 5.04(B) and 5.10. Under NYMEX Rule 5.11, the two-year limitation tolls when the parties have 
40

 Arbitration proceedings are initiated when the party desiring to submit a matter to 

Arbitration (“claimant”) files with the Exchange three executed copies of a Statement of Claim 

(“Statement”) setting forth a concise description of the claim or grievance and the name and 

address of the person(s) from whom relief is sought (“respondent”). The claimant must also 

provide any documents and the names of witnesses upon whom it intends to rely to support its 

claim. The Statement should specify the relevant facts, the remedies sought (including the 

method by which damages were computed), and the basis upon which relief is sought. The 

Statement must be accompanied by payment of an arbitration fee ranging from a minimum of 

$100 for claims up to $5,000, to a maximum of $1,150 plus one-half of one percent of any 

amount over $100,000.66

 A copy of the claimant’s Statement must be provided promptly to the respondent, who 

then has 20 days to file an Answer and any Counterclaims with the Exchange. If no Answer is 

filed, the allegations in the Statement are deemed denied. The Counterclaims of a member 

respondent against a customer must arise out of the transaction or occurrence that is the subject 

of the customer’s claim or grievance. The claimant must respond to any such Counterclaims 

within ten days.67

 In the case of customer-member arbitrations, an arbitration panel usually consisting of 

three persons is appointed by the Chairman of the Arbitration Committee. At the customer’s 

request, two of the panel members must be persons who are not members of, or associated with, 

 

filed their Statement of Claim and Answer. 

66 NYMEX Rule 5.37(A). 

67 NYMEX Rule 5.18(A)(2). 
41

a member of any commodities exchange.68 If a matter involves a dollar amount not exceeding 

$2,500, it will be decided by a single arbitrator appointed by the Chairman of the Arbitration 

Committee, and may be decided without a hearing. If a customer is a party, he may request that 

the sole arbitrator not be a member of, or associated with a member of, any commodities 

exchange.69 

The Exchange must notify the parties in writing of the name and business affiliation of 

each arbitrator at least twenty days prior to the date fixed for the initial hearing session.70 The 

parties have the right to file written objections to particular arbitrators with the Chairman of the 

Arbitration Committee. Panel members have a continuing obligation to notify the Chairman of 

any direct or indirect financial or personal interest in the outcome of the arbitration, and any 

existing or past professional, family, or social relationship with any party, its counsel, or any 

individual whom they have been told will be a witness, which are likely to affect impartiality or 

create an appearance of bias.71 The parties must be notified of any such notifications and may 

file written objections with the Chairman. 

 Arbitration proceedings are held at a time and place determined by the Exchange. Each 

party has the right to be represented by counsel.72 Each party also has the right to present its 

claims, defenses, counterclaims, evidence, and witnesses. Prior to hearing, parties may formally 

request relevant documents and information from other parties. Each party also must provide the 

 

68 The customer’s Statement of Claim must specify whether the customer wishes the controversy to be heard by an 

arbitration panel that is comprised of a majority of persons not associated with a member of any commodities 

exchange. NYMEX Rules 5.07(B) and 5.18(A)(1)(a). 

69 NYMEX Rule 5.09. 

70 NYMEX Rule 5.16. 

71 NYMEX Rule 5.14(A). 

72 NYMEX Rule 5.19. 
42

Exchange and other parties with copies of any documents they intend to use at the hearing and 

the names of all witnesses who may testify on their behalf. Parties may examine witnesses 

appearing at hearing. The arbitrators, at the request of any party, may direct the appearance of 

any member, or any person employed by or associated with any member, who is not a party to 

the arbitration. They may also direct the production of any records in the possession or control 

of such persons.73

 Arbitration panels must make every effort to render a decision within 30 days from the 

date the record is closed. The decision must be in writing and signed by a majority of the panel. 

The panel may award damages sought, and may assess arbitration fees, expenses, and costs 

associated with the hearing against the losing party. The panel may also assess against a party all 

or any portion of the reasonable attorney fees incurred by any other party upon finding that it 

advanced a frivolous claim or defense, or engaged in willful acts of bad faith during the course of 

the arbitration.74 

Any award granted to a claimant against a member or an employee of a member must be 

paid within ten business days after the member or employee is notified of the award. Failure to 

satisfy an award is a violation of Exchange rules and grounds for automatic suspension from all 

rights and privileges of membership. Awards are final and not subject to Exchange review or 

appeal. Awards may be entered as a judgment in any court of competent jurisdiction.75

 

73 NYMEX Rules 5.24 and 5.26. 

74 NYMEX Rule 5.36(A) and (E). 

75 NYMEX Rule 5.36 (A), (B), and (F). 
43

B. Member-to-Member Arbitration

The Exchange’s member-to-member arbitration procedures generally are similar to those 

for customer arbitration. However, members and member firms must arbitrate any claim or 

grievance arising wholly or partially, directly or indirectly, out of, in connection with, or as a 

result of: (1) any transaction executed on the Exchange; and (2) the business of such member or 

member on the Exchange. Also, arbitration panels for member-to-member disputes consist only 

of members or members’ employees.76 Parties in member-to-member arbitrations also have the 

right to representation by counsel.77

C. Arbitrations During the Target Period

Four arbitrations were brought during the target period. Of these, two involved 

customer-member disputes and two involved member-to-member disputes. One, a member-tomember arbitration, was settled during the target period. The Division’s review of the file found 

that the dispute was handled in conformance with the Exchange’s arbitration rules and 

procedures, and was completed in a timely manner. 

D. Conclusions and Recommendations

The Division found that the Exchange’s arbitration rules provide fair and equitable 

procedures for the resolution of customer and member disputes. Customers have the opportunity 

to have their claims heard by unbiased panels, including panels where a majority of the panelists 

are not members of, or associated with, any member of a contract market. Each party has the 

right to counsel. Each party also receives adequate notice of the claims against it, and has an 

opportunity to present all of its claims, defenses, and counterclaims. In addition, the Exchange’s 

 

76 NYMEX Rule 5.07(A). 

77 NYMEX Rule 5.19. 
44

arbitration rules require a prompt hearing and authorize prompt, written awards that are not 

subject to appeal within the Exchange. 

 The Exchange also provides adequate procedures for mandatory member-to-member 

arbitration, and for disciplinary action to enforce panel decisions. In addition, member-tomember arbitration is independent of customer claims submitted for resolution and does not 

interfere with or delay customer disputes. Finally, the Division found that the one dispute 

decided during the target period was resolved in accordance with Exchange rules and procedures.

Based on the foregoing, the Division has no recommendations in this area.