MARKET SURVEILLANCE

RULE ENFORCEMENT REVIEW OF THE

CHICAGO MERCANTILE EXCHANGE

I. INTRODUCTION 

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

of the market surveillance program of the Chicago Mercantile Exchange (“CME” or 

“Exchange”) for compliance with applicable provisions of Section 5(d) of the Commodity 

Exchange Act (“Act”), as amended by the Commodity Futures Modernization Act of 2000 

(“CFMA”), and Part 38 of the Commission’s regulations. The review covers the target period of 

September 1, 2001 to September 1, 2002.1

The review focuses on two core principles that relate to an exchange’s market 

surveillance program. Core Principle 4, Monitoring of Trading, relates to an exchange’s 

program to prevent manipulation, price distortion, and disruptions of the delivery or cash 

settlement process. Core Principle 5, Position Limitations or Accountability, relates to an 

exchange’s program for enforcing its speculative position limits and position accountability 

rules. Appendix B to Part 38 provides acceptable practices for demonstrating compliance with 

Core Principles 4 and 5.

 

1

 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. This 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 all 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

For purposes of this review, Division staff interviewed officials and market surveillance 

staff from the Exchange’s Division of Market Regulation (“Market Regulation”).2 The Division 

also reviewed numerous documents used by Exchange staff in carrying out the Exchange’s 

market surveillance responsibilities. These documents included, among other things, the 

following:

• computer reports generated by the Exchange’s automated surveillance systems and 

other documents used in market surveillance and speculative limit and position 

accountability enforcement;

• files and records concerning contract expirations, speculative limit and position 

accountability enforcement, and speculative limit exemptions;

• market surveillance files for investigations closed during the target period;3 and

• the Exchange’s market surveillance procedures manual and guidelines.

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

this report on July 7, 2003. On July 15, 2003, Division staff conducted an exit conference with 

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

 

2

 A copy of the October 10, 2002 transcript of those interviews can be found in Appendix 1.

3

 Because no market surveillance matters were referred for disciplinary action during the target period, there were no 

disciplinary files for Division staff to review.
3

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS

A. Surveillance of Market Activity

Findings

• On a daily basis, market surveillance staff review cash and futures prices, spread 

differentials, volume, open interest, large trader and clearing member positions, 

supply and demand fundamentals, and market news. This information is used in 

connection with routine surveillance of market activity and contract expirations.

• Market surveillance staff review several large trader reports daily to monitor large 

positions. Large trader data are included in the Exchange’s Regulatory Position 

System, which permits users to access data through a series of computer reports and 

on-line screen applications that analyze large trader activity according to predetermined sorts. Users also have the flexibility to sort and analyze data based on 

individually selected criteria.

• Surveillance of expiring contracts is tailored to individual markets and the sector in 

which they trade. For physically-delivered agricultural contracts, CME focuses on 

monitoring open interest, deliverable supply, and the ability of shorts to make 

delivery, in addition to cash and futures prices and large trader information. To 

ensure that futures and cash prices converge as delivery approaches, analysts 

regularly contact hedgers, producers, and users in agricultural markets to keep 

apprised of underlying cash markets.

• As expiration approaches for the Exchange’s cash-settled financial contracts, CME 

primarily focuses on the potential for price manipulation, rather than on deliverable 

supply and participants’ ability to deliver, as it does for agricultural contracts. In 

doing so, market surveillance staff focuses on price movement and the identity and 

positions of large traders in the market. 

 

The Division has no recommendation in this area. 
4

B. Enforcement of Speculative Position Limits and Position 

Accountability Rules

Findings

• The Exchange has adequate procedures for reviewing hedge exemption applications 

and for monitoring for possible speculative limit violations and traders who exceed 

position accountability thresholds.

• Staff reviews large trader reports daily to detect positions in excess of the Exchange’s 

speculative position limits and to examine large trader activity for indications of 

accounts that should be aggregated for speculative limit purposes.

• Speculative position limit investigations were thorough, well documented, and closed 

in a timely manner. On average, investigations were open for only 35 days.

• Position accountability inquiries were thorough and contained adequate 

documentation. However, the Division found that four of 14 position accountability 

inquiries were open for lengthy periods of time, ranging from approximately 90 to 

236 days. The delays in closing three of the investigations appear attributable to 

firms or individuals failing to timely respond to an Exchange request for information. 

There was no evidence in the respective investigation files that the Exchange made 

follow-up telephone calls or sent reminder letters in an effort to collect the requested 

information.

Recommendation

The Exchange should improve the timeliness of its position accountability 

inquiries by promptly following-up on information requests with telephone calls 

and letters, and if a response is not immediately forthcoming, take appropriate 

action.

C. Enforcement of Exchange EFP Rules

 Findings

• During the target period, 7,524,614 contracts, representing two percent of the 

Exchange’s volume, were executed via 306,758 EFP transactions. Currency EFPs 

accounted for approximately 85 percent of the Exchange’s EFP volume and 98 

percent of EFP transactions. 

• The Exchange experienced significant growth in EFP volume in interest rate and 

equity index products. Specifically, 549,578 interest rate contracts and 554,279 

equity index contracts were transacted via EFP, accounting for approximately 15 

percent of the Exchange’s EFP volume. Agricultural EFPs accounted for less than 

one-half of one percent of the Exchange’s EFPs.
5

• The Exchange reviews a daily report to identify EFPs that may have unusual 

characteristics that warrant further investigation to ensure that the EFPs are bona fide 

and comply with EFP rules. 

• This methodology resulted in the initiation of 16 EFP investigations during the target 

period. Four of the investigations involved currency EFPs, and six each involved 

agricultural and equity index EFPs. No interest rate EFP investigations were opened 

during the target period. Given that currency EFPs represent such a large percentage 

of EFP volume and transactions, and in view of the significant growth in the use of 

interest rate EFPs, the Exchange should examine a larger number of EFPs in these 

products to ensure that member firms are complying with Exchange rules. 

• The Exchange completed 17 EFP investigations during the target period. The 

investigations were thorough, adequately documented, and completed in a timely 

manner. 

Recommendation

The Exchange should review its EFP program and implement modifications to 

ensure that an adequate number of currency and interest rate EFPs are 

examined for compliance with Exchange rules.

D. Adequacy of Miscellaneous Market Surveillance Investigations

Findings

• Exclusive of speculative limit, position accountability, and EFP investigations, the 

Exchange closed eight additional market surveillance investigations during the target 

period. 

• With the exception of a revocation of a hedge exemption, all of the miscellaneous 

investigations were closed with no further action. 

• The investigations were completed expeditiously, well documented, and conducted in 

a thorough manner.

The Division has no recommendation in this area. 
6

III. SURVEILLANCE OF MARKET ACTIVITY

A. Market Surveillance Staffing

Market Regulation administers the Exchange’s market surveillance and trade practice 

surveillance programs. Market Regulation’s market surveillance staff includes an Associate 

Director, three managers and five analysts.4 These nine individuals have considerable industry 

and Exchange experience ranging from three years to more than 25 years.5

The market surveillance management team includes three product managers who report 

to the Associate Director of Market Surveillance. The three product managers include the 

Associate Director of Financial Surveillance, the Manager of Agricultural Surveillance, and the 

Manager of Currency Markets. The financial surveillance product manager directly supervises 

one “senior analyst,” one “experienced analyst,” and one analyst who monitor all financial 

contracts (i.e., interest rate and equity products). The agricultural surveillance product manager

directly supervises two “experienced” analysts who monitor all agricultural products. The 

currency surveillance product manager monitors all currency products. The Associate Director 

of Market Surveillance oversees all market surveillance operations and reports directly to the 

Managing Director of Regulatory Affairs. 

Market surveillance staff reviews large trader and clearing member positions, EFPs, 

transfer trades, prices, volume, open interest, and other market factors on a daily basis. Each 

 

4

 The Surveillance Systems Manager and two database specialists also assist market surveillance staff.

5

 The Associate Director of Market Surveillance, who was a member of the Exchange’s International Monetary 

Market (“IMM”) for 21 years, has served in his current position for five years. Prior to this position, he was a 

compliance consultant for the Exchange for two years. While an IMM member, he worked as a floor trader/broker 

for six years and served as a floor manager for a futures commission merchant (“FCM”) for 13 years. The financial 

surveillance product manager has a total of 18 years of Exchange experience, including 14 years in market 

surveillance. The agricultural surveillance product manager has a total of 15 years of Exchange experience, 

including 91⁄2 years in market surveillance. The currency surveillance product manager has a total of 20 years of 

industry experience, including seven years in Exchange market surveillance. The five market surveillance analysts 

have Exchange market surveillance experience ranging from three years to 17 years. 
7

analyst, as well as the currency surveillance product manager, is responsible for monitoring 

trading activity and market developments in each of their assigned contracts.6 Analysts also 

contact major market participants to gain first-hand knowledge regarding their particular 

markets. 

The Exchange’s Market Surveillance Guidelines (“Guidelines”) are used for training and 

reference purposes. The Guidelines outline general market surveillance procedures and include, 

among other things, an overview of market surveillance activities, contract specifications, and 

sections regarding data collection, data analysis, speculative position limits, position 

accountability, and EFP reviews. The Guidelines also include a list of all computer-generated 

reports available to market surveillance staff on a routine basis and position limit exemption 

applications. Market surveillance managers and analysts also attend Exchange-hosted seminars 

to further augment their industry knowledge. In addition, staff may attend committee meetings 

associated with particular Exchange products to gain further insight and knowledge.

The Division found that the Exchange’s market surveillance staff is sufficiently 

experienced and knowledgeable to conduct the Exchange’s market surveillance program. 

B. Prices, Volume, Open Interest, and Market News 

On a daily basis, market surveillance staff collects and analyzes price, volume, open 

interest, and market news in all Exchange-traded contracts. This information is used in 

connection with routine surveillance of market activity and contract expirations. As explained 

below, use of on-line quotation systems combined with computer-generated reports enhance 

staff’s ability to conduct several types of analyses quickly and efficiently.

 

6

 Staff has access to Globex observation terminals to observe real-time Globex trading.
8

Price data and market information are collected from a variety of sources, including 

Bloomberg, Reuters, the Internet, and “Mercquote,” the Exchange’s real-time, in-house 

quotation system. Mercquote is directly tied into the price quotation boards on the Exchange’s 

trading floor.

7

 The system allows staff to identify and monitor unusual price changes and 

abnormal price relationships on a real-time basis. Mercquote also displays intra- and intercommodity spread quotations and prices from external sources, such as the Chicago Board of 

Trade and the U.S. Department of Agriculture (“USDA”). 

In addition, market surveillance staff makes extensive use of the Daily Information 

Bulletins produced by CME’s Statistics Department. These bulletins, which reflect various 

market data for the previous day’s trading session, provide a ready source of futures price data, 

as well as information relating to the underlying cash markets.8 The bulletins also contain 

volume and open interest statistics and the daily high, low, and settlement prices for each futures 

and options contract. Staff also has on-line access to a historical statistical database that includes 

two years of open interest and volume data. The database allows staff to construct historical 

comparisons to analyze the relative liquidity of each market.

For a detailed analysis of open interest, staff reviews the Commitment Report. This 

report lists open interest by contract and contract month. Within each contract month, the report 

is divided into customer, house, and combined house and customer positions for each clearing 

member. Each of these three positions is then divided into gross long and gross short positions, 

with the net change of positions from the previous business day also shown.9 The report is 

 

7

 CME price, volume, and open interest information also is disseminated on the Exchange’s website and to venders 

who publish electronically.

8

 Cash market information includes livestock and meat prices from the USDA, U.S. Treasury Bill auction results, 

and foreign exchange currency data. A copy of a Daily Information Bulletin can be found in Appendix 2.

9

 A copy of the Commitment Report can be found in Appendix 3.
9

primarily used to identify potential concentrations of positions at one or more clearing firms. 

The report also is used to monitor the level of open interest in a contract as it approaches last 

trading day to help determine whether the contract is liquidating in an orderly manner.

C. Large Trader Position Reporting

CME Rule 8.17 requires clearing members to report daily all positions for all entities, 

which, at the close of trading, own any position greater than or equal to the reportable position 

levels (gross long or short) established by the Exchange for each contract.10 To ensure 

compliance with CME Rule 8.17, the Exchange compares large trader reportable data to open 

interest data. If a large percentage of unreported positions are identified for a particular firm, the 

firm is contacted and asked to identify those positions that were not reported. Typically, the 

firm’s back office system has either incorrectly identified or omitted a reportable account. Large 

trader position data are used to enforce compliance with CME regulations regarding reportable 

accounts, speculative position limits, open interest reporting, aggregation of accounts, and for 

risk management purposes. 

Subsequent to the Division’s previous rule enforcement review of the CME, dated 

September 28, 1999 (“1999 Review”), the Exchange upgraded its large trader reporting system. 

Large trader data are now included in the Exchange’s Regulatory Position System (“RPS”). 

RPS, which contains two years of position data, has more functionality and provides users with 

greater flexibility than the older system.11 For example, RPS has account search tools and allows 

users to merge different data streams. In addition, all reports used to review large trader activity 

are available on-line. Users can access data through a series of computer reports and on-line 

 

10 A list of all CME reportable levels can be found in Appendix 4. 

11 The Exchange’s previous large trader reporting system only maintained six months of position data on-line. Data 

older than two years are archived. Presently, the Exchange has 20-years of archived position data. RPS also 

includes position, clearing, and account data. 
10

screen applications that analyze large trader activity according to predetermined sorts. RPS also 

provides users with the capability to sort and analyze data based on individually selected criteria. 

Market surveillance staff analyzes several RPS reports daily to monitor large trader 

activity. Among these reports are several versions of the Watch/Account Report.12 A 

watch/account is a set of accounts that are grouped together based on specific criteria, such as 

common ownership or control, or that exhibit similar trading patterns.13 The Watch/Account 

Reports allow the Exchange to determine at any given point the total market exposure of market 

participants in a particular watch/account and to detect potential concentrations of positions as 

they develop. RPS also has enhanced staff’s capability to sort watch/account data. For example, 

an analyst may choose a watch/account with or without option positions, ranked by net futures 

equivalents, or ranked by overall combined positions. In addition, position data for all accounts 

with the same watch number can be extracted to review the trading activity for a particular large 

trader. 

The Book Report is another RPS large trader report routinely used by staff to monitor 

large traders. The Book Report is sorted by commodity and contract month, as well as by 

clearing firm, account number, account title, and position.14 The report indicates each reportable 

account’s current position, the previous day’s position, and the change between the two, and 

provides staff with a useful tool for monitoring position limit violations and concentrations of 

positions among related accounts. The Book Report also is reviewed daily for occurrences of 

unusually large position changes and unusual trading activity.

 

12 Copies of the Watch/Account Reports can be found in Appendix 5. 

13 Each account number contained within RPS may be assigned up to six multiple “watch numbers” and more than 

one account can be assigned the same watch number.

14 A copy of the Book Report can be found in Appendix 6.
11

D. Contract Expirations

1. Overview

Market surveillance staff monitors maturing contracts on a daily basis to detect and 

prevent market disruptions, avoid delivery defaults, and ensure orderly liquidations. As 

expiration approaches, staff focuses on any anomalies in trading patterns and market activity as 

compared with prior expirations. Staff also closely monitors cash and futures prices, spread and 

basis relationships, size and ownership of deliverable supply for physical delivery contracts, 

clearing member positions, large trader positions relative to the total open interest, and the 

positions of large traders. 

In addition, staff monitors position adjustments and transfer trades using the Position 

Adjustment Report and the Transfer Report.15 The Position Adjustment Report indicates an 

adjustment to a firm’s open interest made necessary when a clearing member incorrectly reports 

its position. The Transfer Report allows analysts to monitor position transfers from one account 

to another, either within the same firm or from one firm to another. This report is used to 

monitor the movement of large positions from one firm to another, and to identify any positions 

transferred that may have resulted in a change in ownership in violation of the Exchange’s open 

outcry requirements. 

2. Surveillance Tailored to Different Markets

Expiration surveillance is tailored to individual commodities and the sectors in which 

they trade. For instance, the Exchange’s expiration surveillance for agricultural products 

significantly differs from that conducted for financial products due to the difference in the 

availability of cash market information and the method of delivery. Information concerning the 

 

15 Copies of the Position Adjustment Report and the Transfer Report can be found in Appendix 7.
12

underlying cash markets for financial products is readily available through news services, the 

Internet, and other sources. However, the same is not true for agricultural products. Three or 

four days can pass in the live cattle and hog cash markets without a reported cash quote. 

Therefore, to ensure that futures and cash prices converge as delivery approaches, analysts 

regularly contact hedgers, producers, and users in the agricultural markets to keep apprised of 

underlying cash markets. 

Agricultural contract expirations present additional concerns because most agricultural 

contracts, unlike the Exchange’s financial contracts, are settled via physical delivery.16 The 

physical delivery aspect requires that the Exchange closely monitor available supply and 

participants’ delivery intentions to ensure orderly liquidations. In this connection, the CME 

Clearinghouse produces several reports that allow the Exchange to monitor the deliverable 

supply of products stored in Exchange-approved warehouses, e.g., frozen pork bellies and butter. 

These reports list certified loads by location and clearing member firm. For currencies and nonstorable deliverable products such as live cattle and lumber, Exchange and Clearinghouse staff 

contact clearing member firms during the delivery period regarding each short position holder’s 

ability to make delivery. 

The Exchange monitors deliveries by reviewing the Blotter Report. The report, which is 

compiled by the Clearinghouse, is a chronology of long positions sorted by firm and trade date. 

The report is constructed only for expiring contracts and is used by the Clearinghouse for the 

assignment of deliveries.17 Analysts use the Blotter Report to determine which firms and traders 

 

16 Milk, Class IV Milk, Non-Fat Dry Milk, Feeder Cattle, and Lean Hogs are the Exchange’s only cash-settled 

agricultural contracts. Although the Exchange’s currency contracts are physically-delivered, for surveillance 

purposes they are treated more like cash-settled financial contracts due to their virtually unlimited supply.

17 Deliveries are assigned on the basis of the first delivery going to the holder of the oldest open position. A copy of 

the Blotter Report can be found in Appendix 8.
13

may be in position to receive deliveries, a significant factor in those commodities where

deliverable supply may be limited. The Blotter Report also is used to identify situations where a 

trader might use the delivery process, or the taking of deliveries, to influence futures prices 

during a contract’s expiration. 

As expiration approaches for the Exchange’s cash-settled and currency contracts, analysts 

primarily focus on the potential for price manipulation, rather than on deliverable supply and 

participants’ ability to deliver, as it does for agricultural contracts. In doing so, market 

surveillance staff focuses on who the market participants are and how their trading activity 

compares to their trading activity during prior expirations. For example, an analyst may take 

notice and question a market participant who is not rolling a position into the next deferred 

month as it usually does, or pay close attention to a market participant with a long position going 

into expiration if that same participant typically maintained a short position during past 

expirations or vice versa.18 

Surveillance for the S&P 500 and Eurodollar contracts, both of which are cash-settled, is 

tailored to the individual characteristics of those markets. The S&P 500 contract is unique in 

that the last day of trading for the expiring contract is the Thursday prior to “triple witching 

Friday.”19 Positions in the S&P 500 futures contract are marked to market at the close on 

Thursday and then the contract is settled on Friday morning based on the first trade in each 

underlying component of the S&P 500 equity index. The Exchange has developed a special 

report for monitoring the expiration of the S&P 500 futures contract, the “Index Arbitrage 

 

18 Analysts also look for atypical trading activity in agricultural contracts. For example, in July 2002, trading in the 

expiring July 2002 Lumber futures contract appeared typical based on past experience. However, market 

surveillance staff noticed that the profile for the September 2002 contract at the time was changing earlier than 

would be expected. Surveillance was intensified for the September contract, although the July contract was still 

trading, and CME staff was in frequent contact with Commission staff until the September 2002 contract expired.

19 Triple witching Friday is the third Friday of March, June, September, and December when stock index futures are 

settled and stock index options and stock options contracts expire on the same day. 
14

Participants Report.” The report is a spreadsheet created for each trading day during the last two 

weeks of trading that contains gross long and short positions, day-to-day positions and position 

changes, and chronicles position concentrations relative to open interest.20 The report apprises 

the Exchange of participants who may be using the S&P 500 futures contract for index arbitrage 

purposes in the days leading up to expiration.21 Keeping track of the potential number of 

contracts associated with index arbitrage allows the Exchange to predict the level of volatility 

that can be anticipated on the Friday morning’s opening during which the S&P 500 futures 

contract final settlement price is determined. In addition to assisting with predicting expiration 

morning volatility, the Index Arbitrage Participants Report serves as a tool to monitor large 

position holder activity.

The Eurodollar market is unique, because unlike other Exchange contracts, the front 

month contract is not considered the expiring contract for surveillance purposes. In Eurodollars, 

open interest and volume typically move forward a few months prior to expiration of the lead 

contract and the next deferred contract, in effect, becomes the front month. Consequently, 

market surveillance staff focuses it surveillance activities on the next deferred month at an early 

stage. Expiration of the spot month, therefore, generally is not significant for surveillance 

purposes because the bulk of open positions have long been rolled forward into the deferred 

months and users who are in the market at expiration are balancing an existing cash portfolio 

against expiring contracts.

 

20 A sample of an Index Arbitrage Participants Report can be found in Appendix 9.

21 Index arbitrage is a trading strategy that seeks to exploit the spread differential (the basis) between the futures and 

the underlying equity basket at expiration. The strategy dictates that traders purchase (sell) a basket of equities 

while simultaneously selling (buying) an equivalent dollar value of futures contracts. At expiration, the stock basket 

is unwound while the futures positions are allowed to expire to cash settlement. Because the values of both 

instruments will converge at expiration, depending on transaction costs and “cost of carry,” a profit opportunity can 

exist if the original pricing was favorable.
15

3. Expiration Summary Files

Division staff examined 13 expiration summary files (“ESFs”) prepared by the Exchange 

during the target period. These included six agricultural ESFs, six financial ESFs, and one 

currency ESF that contained 11 separate currency expirations.22 ESFs for physically-delivered 

agricultural contracts contained data that primarily focused on delivery, including closing 

summary memoranda that provided details regarding the certified deliverable loads reported at 

the beginning and end of the delivery period, the number of deliveries that took place during the 

delivery period, and the number of contracts open on the last trading day. In addition, delivery 

and open interest statistics were compared to the same expiration in the previous year. These 

ESFs also contained logs documenting staff’s conversations with market participants and 

Commission staff, cash and futures price data, large trader position information, and pertinent 

news stories. 

Documentation in ESFs for cash-settled financial contracts and physically-delivered 

currencies, on the other hand, demonstrated the Exchange’s focus on monitoring price movement 

and large trader positions in those contracts. For example, the November 2001 Eurodollar ESF 

included several different reports generated by the Exchange’s large trader reporting system, 

including the Book Report and various Watch/Account reports.23 The ESF also contained sixmonth price charts with volume and open interest statistics and Bloomberg tables listing the 

British Bankers’ Association (“BBA”) survey of member banks’ Libor rates and U.S. dollar 

interest settlement rates. CME uses BBA interest settlement rate data to compile a document that 

 

22 The 13 ESF’s examined were prepared for the following contracts: November 2001 and June 2002 Eurodollars, 

March 2002 S&P 500, June 2002 Euroyen, September 2001 NASDAQ-100, November 2001 Lumber, December 

2001 and August 2002 Live Cattle, August 2002 Lean Hogs, September Nikkei 225, February and March 2002 

Frozen Pork Bellies, and March 2002 Currencies (including British Pound, Australian Dollar, Canadian Dollar, Emini Eurodollar F/X, Japanese Yen, E-mini Japanese Yen, Mexican Peso, South African Rand, Eurodollar F/X 

British Pound, and Eurodollar F/X Japanese Yen). 

23 The contents of the Book Report and Watch/Account reports are discussed at p. 10.
16

shows CME Eurodollar positions held by BBA member banks at expiration and their survey 

settlement quotes. The final cash-settled price for expiring Eurodollar contracts is based on the 

survey of BBA interest settlement rates. The document allows the Exchange to see whether a 

bank’s settlement quote may have been influenced by its Eurodollar position. Similarly, for each 

currency, the March 2002 Currency ESF also included several reports generated from the 

Exchange’s large trader reporting system, including the Account Positions by Contract Month 

Report and Book Report. The ESF also included for each currency a summary sheet listing up to 

the ten largest long and short position holders, an Open Commitment by Position Account 

Report that showed total open interest by firm and account number and name, and several graphs 

relating to technical price data. 

IV. ENFORCEMENT OF SPECULATIVE POSITION LIMITS AND 

POSITION ACCOUNTABILITY RULES

A. Speculative Positions Limit Exemptions

Market Surveillance staff also are responsible for reviewing and processing speculative 

position limit exemption applications. Pursuant to CME Rule 543, speculative limit exemptions 

may be granted for bona fide hedges, risk management positions,24 arbitrage/inter-commodity 

spread positions, option-option and option-future spreads, and independently controlled 

positions.25 A separate exemption application must be completed for each commodity or 

approved inter-commodity spread for which an exemption is sought.

 

24 CME Rule 543A.2. defines "risk management positions" to include futures and options in financial or index 

markets (1) which are held on behalf of a commercial entity or an affiliate of a commercial entity that typically buys, 

sells or holds positions in the underlying or a related cash market, (2) for which the underlying cash market has a 

high degree of demonstrated liquidity relative to the size of positions, and (3) which satisfy one or more of three 

specified sets of criteria.

25 Entities eligible for independently controlled position exemptions include commodity pool operators and 

commodity trading advisors which authorize an independent account controller to control all trading decisions for 

positions they hold directly or indirectly, but without day-to-day direction. The aggregate position held or 

controlled by each such account controller may not exceed the speculative position limits. CME Rule 543.G.
17

In general, each exemption application requests the hedger or spreader to specify, in 

futures equivalents, the maximum number of contracts, long and short, sought for each future 

month and for all months combined.26 The Exchange grants each exemption in futuresequivalent form, allowing any combination of futures and options in the hedging or spreading 

strategy, as long as the total futures-equivalent position does not exceed the granted exemption 

level.

No trader is allowed to exceed a speculative position limit in an agricultural commodity 

until he or she has filed the appropriate application and received Exchange approval. Unlike 

agricultural exemptions, traders in financial markets, except stock indexes, are permitted to 

exceed the limits for several days prior to filing an application--five business days for new 

applicants and ten business days for traders who want to increase an existing exemption.27 A 

trader intending to exceed speculative position limits in stock index futures may request verbal 

approval prior to exceeding such limits. If the request is granted, an application must be filed 

promptly thereafter. 

Agricultural hedge exemptions are granted on a calendar-year basis and traders must 

reapply in the fall of each year, while financial hedge exemptions must be renewed bi-annually. 

During the target period, the Exchange granted exemptions to 58 entities in at least one type of 

agricultural commodity, and to 21 entities in at least one financial contract. Although no hedge 

exemption applications were denied during the target period, some exemption requests were 

granted at levels lower than requested. 

 

26 Since the 1999 Review, the Exchange has modified its hedge exemption application for agricultural contracts. 

The modified applications, which allow applicants to complete the form in a detailed step-by-step manner, have 

significantly streamlined the application and approval process. A copy of a modified hedge exemption application 

can be found in Appendix 10. 

27 All IMM and Index and Option Market contracts except lumber, gasoline, crude oil, and options on cattle and 

hogs, are considered to be financial contracts.
18

Division staff reviewed hedge exemption files for 14 entities, which included multiple 

exemptions of differing types in different contracts. The Division found that the Exchange 

completed its review of exemption applications in a timely manner and that the files contained 

adequate supporting documentation. Each file included appropriate applications, formal 

approval forms and letters. In addition, agricultural exemption files included spreadsheet 

analyses addressing spot month, scale down, non-spot, and all-months-combined exemption 

requests.

B. Speculative Limit Violations

Market surveillance staff reviews large trader reports, including the Position Limit 

Report, daily to detect positions in excess of the Exchange’s speculative position limits and to 

examine large trader activity for indications of accounts that should be aggregated for 

speculative limit purposes.28 The Position Limit Report lists accounts that are near or over 

speculative position limits. If an account or group of aggregated accounts is over the limit, an 

investigation is opened and the clearing firm(s) carrying the account(s) is immediately contacted 

via telephone. The clearing firm is instructed to reduce the position or have the account owner 

apply for an exemption, if eligible, and a warning letter or cease and desist order is issued.29

During the target period, 13 speculative position limit violation investigations were 

closed, nine of which involved agricultural markets and four of which involved financial 

markets. The Division reviewed all 13 of the investigations and found that they were thorough, 

well documented, and closed in a timely manner. On average, each investigation was open for 

only 35 days. Warning letters were issued in connection with all of the investigations and a 

 

28 A copy of the Position Limit Report can be found in Appendix 11.

29 A staff warning letter is issued to first time speculative limit violators. Another violation within 12 months of the 

warning letter will result in a cease and desist order and a possible fine. CME Rule 443.A.
19

cease and desist order was issued as a result of one of the investigations.30 In each instance 

investigated, the position was promptly reduced or an exemption application was submitted in a 

timely manner.

C. Position Accountability

Eurodollars, currencies, currency cross-rates, one-month LIBOR, and two- and five-year 

swap contracts are subject to the Exchange’s position accountability rules. In place of absolute 

position limits, the accountability rules mandate levels, or thresholds, at which large traders may 

be required to respond to special requests by the Exchange for information relating to their 

positions. Specifically, the accountability rules provide that any trader who exceeds the former 

speculative position limits, which were replaced by accountability levels, will be required to 

“provide, in a timely fashion, upon request by the Exchange, information regarding the nature of 

the position, trading strategy, and hedging information if applicable." 31 

 The Exchange initiates a position accountability inquiry when positions for any account 

or group of aggregated accounts exceed previous speculative limit thresholds. In response to a 

recommendation made in the 1999 Review, the Exchange has expanded its Market Surveillance 

Guidelines to include procedures for conducting position accountability inquiries. Under the 

procedures, an investigation file is opened for each inquiry and a standard letter is sent to the 

account owner or controller, directing that the following information be submitted within 21 

days:32 (1) the name, address, and telephone numbers of all account owners; (2) the nature of 

 

30 The Exchange issued a warning letter in connection with a Live Cattle speculative limit violation. Shortly 

thereafter, the Exchange realized that it was a second violation in a 12-month period and issued a cease and desist 

order. Investigation No. 01-19568-MS. 

31 The Exchange’s position accountability rules are found within the respective chapter governing the particular 

contract market.

32 If the account owner or controller is not an Exchange member, the Exchange will contact the clearing firm 

carrying the position and the clearing firm will forward the letter to the account owner or controller. Typically, 

responses are sent directly to the Exchange. 
20

business of all account owners; (3) the name and title of each person responsible for trading 

control; (4) a description of how the futures and/or options positions in the particular contract are 

utilized;33 and (5) a list of all clearing members or non-clearing FCMs or foreign brokers where 

accounts are maintained, including account numbers and the account executives. Subsequent to 

an initial inquiry, any account or group of accounts that remains over the position accountability 

threshold is contacted bi-annually to ascertain whether material issues affecting the account(s) 

have changed.34 

The Division reviewed the files for the 14 position accountability inquiries closed by the 

Exchange during the target period. The inquiries were thorough and contained adequate 

documentation. Each file included a General Investigation Form that contained relevant 

information regarding the matter, including a brief description and the final disposition; a 

Position Limit Report; and a copy of the information request letter and responses. However, the 

Division identified several inquiries that were open for lengthy periods of time before requested 

information was submitted and a determination was made. In one inquiry that remained open for 

131 days, the Exchange requested account information on January 22, 2002, but did not receive a 

response until May 27, 2002. In another inquiry that remained open for 106 days, the Exchange 

requested account information on December 6, 2001, but did not receive a response until March 

21, 2002.35 Another position accountability inquiry remained open for 236 days, but the 

 

33 With respect to how the futures and/or options positions are utilized, the Exchange requests information regarding 

(1) the percentage of the long side and/or the short side that is a hedge, arbitrage, spread, or speculative position; (2) 

the characterization of the underlying instruments hedged or arbitraged; (3) the dollar value of each underlying 

position; and (4) the calculation used to determine the number of futures and/or options positions related to each 

type of underlying position. 

34 The position accountability threshold for Eurodollars is 10,000 contracts. However, because large positions are 

common in Eurodollars, once an initial position accountability inquiry is conducted for an account, a follow-up 

inquiry is opened only if an account’s position exceeds 50,000 contracts. For all other contracts subject to position 

accountability rules, the threshold for initial contact and follow-up inquiries is the same. 

35 Investigation Nos. 02-19983-MS and 01-19837-MS, respectively. 
21

Division was unable to discern the reason for the delay from the documents in the file.36 Finally, 

one inquiry remained open for over 90 days after a firm submitted an unsigned and incomplete 

CFTC Form 102 rather than responding to the questions in the standard letter.37 

There was no evidence in the files examined by the Division to indicate that the 

Exchange made follow-up telephone calls or sent reminder letters in an effort to collect requested 

information. Although the Exchange’s standard information request letter states that CME Rule 

432.1 deems failure to submit requested information within 30 days a “major” offense, no 

actions were brought during the target period for violation of this rule in connection with a 

position accountability inquiry. The Division believes that to ensure prompt receipt of requested 

material, when necessary, the Exchange should follow-up with telephone calls and letters, and if 

a response is not immediately forthcoming, take appropriate action under CME Rule 432.1. In 

this manner, position accountability inquiries can be completed in a more timely fashion. 

V. ENFORCEMENT OF EXCHANGE EFP RULES

A. Applicable Rules

The Exchange has two rules authorizing EFP transactions: CME Rule 538--Transfer of 

Spot for Futures, and CME Rule 719--Transfer of Cash for Futures after Termination of 

Contract.38 CME Rule 538 permits EFPs during the course of trading of the futures contract, 

 

36 When questioned by the Division, Exchange staff explained that a firm’s proprietary account exceeded the 

applicable position accountability threshold on a Wednesday and that an inquiry was immediately opened and the 

firm contacted. The firm notified the Exchange that it would take longer than usual to provide the information 

because the firm had just merged with another firm. By the following Monday, the account had dropped below the 

threshold. The Exchange never received the requested information but the matter was kept open to monitor the 

account. Although the firm advised the Exchange that there would be a delay in submitting the requested material, 

the Division nevertheless believes that the Exchange should have followed-up and closed the inquiry in a more 

expeditious manner.

37 CFTC Form 102 is intended to identify account owners and to provide account control and contact information 

when an account first becomes reportable, not to address speculative limit or position accountability issues. 

Although the Exchange conducted no further probing, the inquiry remained open for more than three months after 

the firm submitted the incomplete form. Investigation No. 01-18413-MS.

38 The Exchange prohibits EFPs in E-mini and options contracts.
22

while CME Rule 719 authorizes EFP transactions after expiration of a contract.39 All EFPs must 

be recorded on a trading card or order ticket by both parties to the transaction and, following 

execution, be both confirmed to the customer and submitted to an Exchange employee at the 

relevant quadrant's pulpit for posting on the trading floor. CME Rule 538 requires that clearing 

members and brokers maintain full documentation of each EFP transaction. Parties to an EFP 

executed pursuant to CME Rule 719 must also file with the Clearinghouse all documentation 

necessary to verify the nature of the transaction.40 On November 5, 2000, the Exchange issued 

an EFP questions and answers document (“Q&A”) to provide members with a better 

understanding of EFP requirements. The Q&A clarifies the Exchange’s EFP rules and addresses 

questions regarding reporting, clearing, and documentation requirements.41 

During the target period, 7,524,614 contracts, representing two percent of the Exchange’s 

volume, were executed via 306,758 EFP transactions.42 Currency EFPs totaled 6,419,354 

contracts, or approximately 85 percent of the Exchange’s EFP volume.43 In addition, since the 

1999 Review, the Exchange has experienced significant growth in EFP volume in interest rate 

and equity index products. During the target period, these markets together accounted for 

approximately 15 percent of the Exchange’s EFP volume as opposed to five percent in 1999. 

 

39 Under CME Rule 538, an exchange of actual ("spot") commodities for futures contracts requires: (1) a buyer of 

the spot (seller of the future) or a seller of the spot (buyer of the future) to have the commodity in his or her 

possession; (2) the purchase and sale of the futures contract simultaneous to the sale and purchase of an equal 

quantity of the spot; (3) a mutually agreed upon price; and (4) the reporting of the transaction to the Exchange's 

Department of Regulation. EFPs executed pursuant to CME Rule 719, in addition to the above requirements, are 

subject to the approval of the Exchange President; however, this approval has been delegated to the Exchange 

clearinghouse.

40 EFP documentation is defined in Commission Regulation 1.35 (a-2) (4) as “those documents customarily 

generated in accordance with cash market practices which demonstrate the existence and nature of the underlying 

cash transactions, including, but not limited to, contracts, confirmation statements, telex printouts, invoices, and 

warehouse receipts or other documents of title.” 

41 A copy of the Exchange’s EFP Q&A can be found in Appendix 12. 

42 These transactions included 300,431 currency EFPs, which accounted for nearly 98 percent of the Exchange’s 

total EFP transactions, 2,044 interest rate EFPs, 4,179 equity index EFPs, and 104 agricultural EFPs. 

43 EFPs also accounted for approximately 29 percent of total currency volume.
23

Specifically, 549,578 interest rate contracts and 554,279 equity index contracts (most in the S&P 

500 futures contract) were transacted via EFP.44 Only 1,403 agricultural contracts were traded 

via EFPs during the target period, accounting for less than one-half of one percent of the 

Exchange’s EFP volume. 

B. Surveillance Procedures

Market surveillance staff use the “Cash-For-Futures Monthly Summary Report” and the 

“House-to-House Cash for Futures Report” to monitor EFP transactions. The Cash-For-Futures 

Monthly Summary Report shows EFP volume relative to total volume by commodity sector. 

Each month, staff can determine what percentage of total volume was in the form of EFPs in any 

particular contract or across all contracts, identify the firm that clears the most EFPs in any 

month in any particular contract or in all contracts combined, and compare EFP volume by sector 

to the previous two months or prior year.45 

The “House-to-House Cash for Futures Report” is a daily report that shows EFPs cleared 

by the Clearinghouse. Among other things, for each cleared EFP the report lists the commodity, 

clearing firm, customer account number, CTI code, quantity bought or sold, trade price, opposite 

clearing firm, trade date and execution time, and submission date and time.46 The Exchange uses 

the report to identify EFPs that may have unusual characteristics, such that they warrant further 

investigation. Unusual characteristics might include an EFP between two locals, an EFP that 

 

44 The growth was most dramatic in interest rate contracts. During the 1999 Review target period, only 987 interest 

rate contracts were executed through EFPs. Although not as dramatic, EFP volume in equity index contracts also 

significantly increased. During the 1999 Review target period, 328,641 equity index contracts were executed 

through EFPs. 

45 A copy of the Cash-For-Futures Monthly Summary Report can be found in Appendix 13.

46 A copy of the House-to-House Cash for Futures Report can be found in Appendix 14.
24

takes longer than usual to clear, an EFP executed at a price significantly different from the 

market price, or an EFP transacted by an account with which staff is unfamiliar.47 

Once a transaction is selected for review, an analyst sends a request to the clearing 

firm(s) involved seeking documents relative to the underlying cash activity associated with the 

EFP. The submitted documentation is then examined to ensure that the cash instrument is 

acceptable and that the quantity of the cash instrument is roughly equivalent to the number of 

futures contracts submitted. The Exchange closed 17 EFP investigations during the target 

period, including six that were opened prior to the target period. Division staff examined those 

17 EFP investigations and found that they were thorough, adequately documented, and 

completed in a timely manner. 

 During the target period, the Exchange reviewed 16 EFPs for compliance with 

Exchange rules. These included four currency EFP investigations, six agricultural EFP 

investigations, and six equity index EFP investigations. Given that currency EFPs represent 85 

percent of EFP volume and 98 percent of EFP transactions, and in view of the significant growth 

in interest rate EFPs, the Division believes that the Exchange should examine a larger number of 

EFPs in these products to ensure that member firms are complying with Exchange rules. 

Increased coverage of these EFPs is essential to ensure that EFPs are bona fide and not designed 

to accomplish an unlawful purpose. Since it does not appear that staff’s routine review of the 

House-to-House Cash for Futures Report yields a sufficient number of currency or interest rate 

EFPs with unusual characteristics, the Division believes that the Exchange should review its EFP 

program and implement modifications to ensure that an adequate number of these EFPs are 

examined for compliance with Exchange rules. 

 

47 For instance, during the target period, the Exchange reviewed a Feeder Cattle EFP transaction between two 

Canadian entities because it was the first time staff had seen an EFP involving these entities. Investigation No. 02-

20106-MS
25

VI. ADEQUACY OF MISCELLANEOUS MARKET SURVEILLANCE 

INVESTIGATIONS

Exclusive of the previously discussed speculative limit, position accountability, and EFP 

investigations, the Exchange closed eight additional market surveillance investigations during 

the target period. Division staff reviewed all eight of these investigations for adequacy and 

timeliness. Five of the investigations were initiated from customer complaints. Three of the 

complaints involved prices in CME’s spot call butter market (with two of the complaints coming 

from the same individual), one complaint involved prices in CME’s spot cheese market and milk 

futures contract, and one complaint involved prices in CME’s live cattle market. In addition, one 

investigation was opened in response to news reports of a market participant’s involvement in an 

alleged Ponzi scheme involving cash cattle. CME examined the participant’s futures trading 

activity, and although the Exchange found no violation of CME rules, the participant’s hedge 

exemption was revoked. The final two investigations involved an aggregation analysis of 

particular accounts in Live Cattle and a review of trading on the Exchange prior to the September 

11, 2001 terrorist attacks. With the exception of the hedge application revocation, all of 

investigations were closed with no further action. 

The Division found that the investigations were completed expeditiously, were well 

documented, and were conducted in a thorough manner. For example, the Exchange analyzed 

three months of activity in the spot butter market to determine whether there was a clear pattern 

of manipulative price activity on the close, as the complaint alleged. The Exchange identified all 

trading sessions that closed with a last trade price that was higher than the previous trade price, 

and analyzed the buy-side activity. The Exchange found that during the 17 sessions identified, 

the buying activity was dispersed among eight of 14 total buy-side participants. The Exchange 

also found that there were only two instances in which the same buyer transacted a higher priced 
26

last trade with the same seller. A similar analysis over the same time period was conducted to 

identify all trading sessions that closed with a last trade price that was higher than the average of 

all prices for that session. The Exchange found that this occurred 20 times and that the buying 

activity was spread among nine of the 14 participants. Again, only twice did the same buyer 

transact a higher priced last trade with the same seller. Based on its analysis of three months of 

activity, the Exchange concluded that there was no clear evidence to support any allegation of 

collusion or to establish a pattern of price manipulation on behalf of any particular participants. 

VII. CONCLUSIONS AND RECOMMENDATIONS

The Division found that the Exchange maintains an adequate market surveillance 

program that includes routine monitoring of futures and cash prices, spread relationships, 

volume, open interest, deliverable supply, clearing member positions and market news. Market 

surveillance staff also analyzes several large trader reports daily to monitor large trader activity 

and to identify unusual activity that could impact orderly liquidations. Large trader data are 

included in the Exchange’s Regulatory Position System that provides staff with the capability to 

analyze large trader activity on-line according to predetermined sorts or to analyze data based on 

individually selected criteria.

The Exchange tailors surveillance of expiring contracts to the characteristic of individual 

markets and the sector in which they trade. In this connection, expiring contract surveillance of 

agricultural contracts primarily focuses on deliverable supply, the ability of shorts to deliver, and 

open interest relative to deliverable supply, while surveillance of cash-settled financial contracts 

primarily focuses on the monitoring of price movement and large trader positions. 

 The Division also found that the Exchange has adequate procedures to review hedge 

exemption applications and to monitor for possible speculative limit violations and for traders 
27

who exceed position accountability thresholds. In addition, the Exchange’s market surveillance 

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

However, the Division found that the Exchange did not open a sufficient number of currency and 

interest rate EFP investigations during the target period to ensure that clearing members 

executing EFPs in these products are complying with Exchange EFP rules and procedures. 

Sixteen EFP investigations were opened during the target period, including four currency EFP 

investigations, six agricultural EFP investigations, and six equity index EFP investigations. No 

interest rate EFP investigations were opened. Given that 85 percent of the Exchange’s EFP 

volume and 98 percent of its EFP transactions were in currencies, and that the Exchange has 

experienced significant growth in the use of interest rate EFPs, the Division believes that a larger 

number of these EFPs must be examined to verify compliance with Exchange rules.

Finally, the Division found that four of the 14 position accountability inquiries were open 

for lengthy periods, ranging from approximately 90 to 236 days. The delay in closing three of 

the inquiries was attributable to firms or individuals failing to timely respond to a routine 

Exchange request for information concerning the size and nature of the positions. There was no 

evidence in the respective files that the Exchange made follow-up telephone calls or sent 

reminder letters in an effort to collect the requested information.

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

• Review its EFP program and implement modifications to ensure that an 

adequate number of currency and interest rate EFPs are examined for 

compliance with Exchange rules. 

• Improve the timeliness of position accountability inquiries by following-up on 

information requests with telephone calls and letters, and if a response is not 

immediately forthcoming, take appropriate action.