RULE ENFORCEMENT REVIEW 

OF THE 

MINNEAPOLIS GRAIN EXCHANGE

Division of Market Oversight 

September 16, 2004
Table of Contents 

I. INTRODUCTION.................................................................................................................. 1 

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

A. Market Surveillance ...................................................................................................... 3 

B. Audit Trail ..................................................................................................................... 3 

C. Trade Practice Surveillance ........................................................................................... 4 

D. Disciplinary Program .................................................................................................... 4

E. Dispute Resolution Program.......................................................................................... 5 

III. COMPLIANCE STAFF ........................................................................................................ 6 

IV. MARKET SURVEILLANCE ............................................................................................... 7 

A. Daily Surveillance Activities......................................................................................... 7 

1. Volume And Open Interest .................................................................................... 8 

2. Price Changes And Intermarket Relationships ...................................................... 9 

3. Deliverable Supplies ............................................................................................ 10 

4. Heightened Surveillance Of Expiring Contracts.................................................. 11

B. Large Trader Reporting And Speculative Limit Enforcement .................................... 13 

C. Monitoring Of EFP Transactions ................................................................................ 14 

D. Conclusions And Recommendations........................................................................... 15 

V. AUDIT TRAIL PROGRAM................................................................................................ 15 

A. Recording of Trade Data ............................................................................................. 15 

1. Open Outcry Orders ............................................................................................. 15 

2. MGEXpress Orders.............................................................................................. 17

B. Trade Timing For Open Outcry Trades....................................................................... 17 

C. Floor Order Tickets And Trading Cards...................................................................... 20 

D. Safe Storage Capability ............................................................................................... 22 

E. Conclusions and Recommendations ............................................................................ 23 

VI. TRADE PRACTICE SURVEILLANCE PROGRAM........................................................ 24 

A. Automated Surveillance System ................................................................................. 24 

B. Floor Surveillance........................................................................................................ 25 

C. Adequacy of Investigations ......................................................................................... 26 

D. Timeliness of Investigations........................................................................................ 28 

E. Conclusions and Recommendations ............................................................................ 28 

VII. DISCIPLINARY PROGRAM ............................................................................................. 29 

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

B. Adequacy of Sanctions Imposed ................................................................................. 30 

C. Timeliness of Disciplinary Proceedings ...................................................................... 32 

D. Conclusions And Recommendations........................................................................... 32 

VIII. DISPUTE RESOLUTION .................................................................................................. 33 
RULE ENFORCEMENT REVIEW OF THE 

MINNEAPOLIS GRAIN EXCHANGE

I. INTRODUCTION 

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

of the market surveillance, audit trail, trade practice surveillance, disciplinary, and dispute 

resolution programs of the Minneapolis Grain Exchange (“MGEX” or “Exchange”) for 

compliance with related core principles under 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.1

 The review covers the period of December 1, 2002 

through December 1, 2003 (“target period”). 

The core principles focused on in the review include Core Principle 4, Monitoring of 

Trading, which 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, which relates to an exchange’s program for enforcing its speculative position 

limits and position accountability rules; Core Principle 10, Trade Information, which relates to 

an exchange’s audit trail program for the recording and safe storage of trade information in a 

manner which enables prevention of customer and market abuses and enforcement of exchange 

rules; Core Principles 2, Compliance With Rules, and 12, Protection of Market Participants, 

 

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

which relate to an exchange’s program for enforcing its rules, conducting disciplinary 

proceedings, and protecting market participants from abusive practices; and Core Principle 13, 

Dispute Resolution, which relates to an exchange’s alternative dispute resolution program for 

market participants. Appendix B to Part 38 provides acceptable practices for demonstrating 

compliance with these core principles.2

 For purposes of this review, Division staff interviewed officials and staff from the 

Exchange’s Department of Audits and Investigations (“A&I”).3

 The Division also reviewed 

numerous documents used by A&I in carrying out the Exchange’s self-regulatory 

responsibilities. These documents included, among other things, the following: 

• computer reports and other documentation used routinely for audit trail enforcement and 

market and trade practice surveillance; 

• audit trail recordkeeping and trade practice investigation files; 

• trade practice investigation, floor surveillance, and disciplinary logs; 

• disciplinary case files; 

• minutes of disciplinary committee and Board of Directors (“Board”) meetings held 

during the target period; and 

• compliance procedures manual and guidelines. 

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

this report on August 26, 2004. On September 1, 2004, Division staff conducted an exit 

conference with MGEX 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 January 22, 2004 transcript of the interview can be found in Appendix 1. 
3

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS

A. Market Surveillance 

Findings 

• MGEX maintains an adequate market surveillance program. The Exchange conducts 

daily market surveillance to identify possible price manipulation or distortion and to 

ensure orderly liquidation of expiring contracts. 

• The Exchange monitors volume and open interest, the relationship between cash and 

futures prices, spread and basis relationships, size and ownership of deliverable 

supply, and the size of large trader positions relative to total open interest and 

deliverable supply. Exchange staff also monitor the bona fides of EFP transactions. 

The Division has no recommendations in this area. 

B. Audit Trail

 Findings 

• MGEX maintains an adequate audit trail program. MGEX’s audit trail includes a 

record of all trade data for open outcry trades in the form of order tickets, trading 

cards, and computer storage of all data entered into the Exchange’s clearing system. 

For trades on MGEXpress, the Exchange’s electronic trading platform during the 

target period, the audit trail includes a complete electronic record of all entries into 

the matching engine. 

• MGEX’s members manually record the time of execution of open outcry trades to the 

nearest minute. Exchange staff use a computerized verification program to monitor 

and enforce compliance with trade timing requirements. During the target period, 

Exchange members maintained an average open outcry trade timing accuracy rate of 

approximately 96 percent. 

• Audit trail reviews of each member’s compliance with MGEX recordkeeping rules 

are typically conducted once each year, and the reviews conducted during the target 

period found high rates of compliance with recordkeeping requirements. However, 

floor members who do not trade on the date selected for review may escape inclusion 

in such reviews. 
4

Recommendation 

• The Exchange should identify the floor members not included in its annual audit 

trail reviews of clearing members, and implement supplementary review 

procedures which ensure that the trading cards and order tickets of those floor 

members are reviewed within a reasonable period of time. 

C. Trade Practice Surveillance

 Findings 

• MGEX maintains an adequate trade practice surveillance program. In order to 

identify instances of potential trade practice violations that require further inquiry or 

investigation, Exchange staff conduct daily review of computer-generated exceptions 

and conduct daily floor surveillance. 

• MGEX closed 35 investigations during the target period, six of which involved 

potential substantive trade practice violations. With one exception, the Exchange’s 

trade practice investigations were thorough. All investigations were well 

documented, included appropriate analyses, and were completed in a timely manner. 

• In one investigation concerning potential wash trading, the Exchange reviewed 14 

trades listed in an exception report for one trading day, but did not expand its 

investigation to include additional trading days in order to determine whether a 

pattern of potential violations existed. 

Recommendation 

• The Exchange should expand the scope of investigations to include additional 

trading dates when review of exception reports suggests the possibility of trading 

violations. 

D. Disciplinary Program

 Findings 

• MGEX maintains an adequate disciplinary program. Exchange disciplinary 

committees are convened whenever the Exchange determines at the conclusion of an 

investigation that charges should be brought against a member for rule violations. 

Exchange rules ensure due process for disciplinary hearings. 
5

• No substantive trade practice matters were referred to disciplinary committees during 

the target period. MGEX referred 11 investigations involving non-substantive 

violations to disciplinary committees, imposing fines totaling $14,325. 

• MGEX’s disciplinary process was less than timely with respect to approximately one 

third of the investigations it decided to forward to the Business Conduct Committee 

during the target period. In several instances, there were substantial delays in 

forwarding matters to the BCC, in issuing charges, or both. 

Recommendation 

• The Exchange should ensure that investigations are presented to the appropriate 

disciplinary committee promptly after they are closed with a recommendation 

for disciplinary proceedings, and that charges are issued promptly. 

E. Dispute Resolution Program

Findings 

• The Exchange maintains an adequate alternative dispute resolution program for 

market participants. One customer dispute was submitted to arbitration during the 

target period, and was handled in accordance with the Exchange’s arbitration 

procedures. 

The Division has no recommendations in this area. 
6

III. COMPLIANCE STAFF

The Exchange’s compliance staff is headed by the Vice President, Market Administration 

(“Vice President”), who joined MGEX in 1987, became Compliance Director in 1991, and 

assumed his current position in June 1997. The Vice President reports to the Exchange President 

and is responsible for the oversight and management of MGEX’s market surveillance, audit trail, 

trade practice surveillance, financial surveillance and disciplinary programs. The Vice President 

oversees the three organizational components of the Exchange’s staff, which are the Service 

Division, the MGEXpress Operations Department, and the Trading Floor Operations 

Department. 

The Service Division consists of the Department of Audits and Investigations (“A&I”), 

which carries out the Exchange’s market surveillance, trade practice surveillance, and audit trail 

programs. A&I is also responsible for financial surveillance and oversight of membership 

issues. The Department is headed by the Director of Surveillance, who reports to the Vice 

President. The Director joined MGEX in February 1991 as a staff investigator, and assumed his 

current position in March 2001. A&I’s staff is comprised of two investigators who report to the 

Director of Surveillance. One investigator has been with the Exchange for approximately three 

years, and the other for approximately two years.4

 Both investigators conduct market 

surveillance, trade practice surveillance, and financial surveillance, and are trained in all aspects 

of the Exchange’s surveillance program. 

The MGEXpress Operations Department is responsible for the operations of electronic 

futures and options trading, while surveillance of electronic trading is conducted by A&I. The 

 

4

 One staff investigator was hired in December 2000 as an Exchange Room Clerk and became a staff investigator in 

July 2001. The other staff investigator was hired in March 2001 as a Compliance Assistant and became a staff 

investigator in August 2002. 
7

MGEXpress Department is headed by a Manager, who supervises two employees.5

 The 

employees operate the help desk for the customer service center, assisting MGEXpress 

customers with issues such as direct access, connectivity and trading rights. 

The Trading Floor Operations Department is headed jointly by two Managers, who share 

responsibility for supervising six full-time and part-time Exchange Room clerks. The clerks 

conduct surveillance of trading pit activity, prepare and distribute market data, report futures and 

options quotations, and assist with member services. 

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

IV. MARKET SURVEILLANCE

A. Daily Surveillance Activities

A&I conducts daily market surveillance in order to identify possible price manipulation 

or distortion and ensure orderly liquidation of expiring contracts. All surveillance activities are 

recorded in the Daily Market Surveillance Log (“DMSL”). A&I monitors volume and open 

interest, the relationship between cash and futures prices, spread and basis relationships, size and 

ownership of deliverable supply, and the size of large trader positions relative to total open 

interest and deliverable supply. 

 During the target period, the Exchange’s total volume of 1,128,253 contracts was 

concentrated in its futures and options contracts for hard red spring wheat, which had a total 

volume of 1,057,945 futures and 44,301 options contracts. The Exchange de-listed its futures 

and options contracts for white wheat and durum wheat and its options contracts for European 

spring wheat on March 20, 2003, during the target period, due to low volume. Spring wheat is 

 

5

 The Manager of the MGEXpress Operations Department was hired in August 1994 as a staff investigator and 

assumed his current position in May 2002.
8

the only commodity for which the Exchange currently offers active contracts for trading by open 

outcry. In February 2002, the Exchange introduced electronic trading of two new cash-settled 

contracts, the National Corn Index (“NCI”) and National Soybean Index (“NSI”) via a new 

electronic trading system, MGEXpress. A third new contract, the Hard Winter Wheat Index 

(“HWI”) was added for MGEXpress trading in May 2003. During the target period, the total 

trading volume on MGEXpress was 26,006 contracts, including 5,908 NCI futures, 1,298 NCI 

options, 13,561 HWI futures, and 5,239 HWI options contracts. Trading on MGEXpress was 

suspended on July 2004, after the conclusion of the target period. 

 1. Volume And Open Interest 

A&I reviews several computer-generated volume and open interest reports daily to 

analyze potential market congestion. The Open Share Of Market-Regular Report, Open Share 

Of Market-Segregated Report, MGEX Futures Trades And Open Positions Report, and MGEX 

Options Trades And Open Positions Report show the gross open positions for both customer and 

house accounts at each of the Exchange’s clearing members. A&I staff review these reports to 

detect potential problems or concentrations of positions with any one clearing member.6

 Staff 

record the largest long and short positions in the nearby and nearest deferred month for each 

MGEX contract in the DMSL, and review this information daily along with the percentage of 

open interest held by each clearing member. Staff also consider external factors that may impact 

the market, such as economic news, weather, or domestic or foreign market crises. In addition, 

staff can consult MGEX’s historical data on volume and open interest by reviewing previous 

daily volume and open interest reports, which are saved in a database on the clearinghouse 

server. 

 

6

 Generally, A&I staff will review situations where a firm has 75% or more of the open market share in an expiring 

contract to determine if manipulation is likely or evident.
9

A&I staff also review all open contracts daily for any significant changes in clearing 

member open interest, defined as an increase or decrease of 30% or more in the total open 

interest in any contract month. Staff monitor such changes by reviewing the Volume and Open 

Interest By Commodity Report and Volume and Open Interest By FCM Report. These reports 

show, by clearing member and commodity, for each contract month or option strike price, the 

gross volume, deliveries and options exercises, delivery or exercise intentions, transfer trades 

and EFPs, and each member’s ending long and short positions. When significant changes are 

detected, staff conduct further inquiry and analysis to ascertain the reasons for the change and the 

impact, if any, on the market. 

2. Price Changes And Intermarket Relationships 

To detect unusual price movements or aberrations in price relationships that could 

indicate an underlying problem, A&I conducts daily reviews of price changes and spread 

relationships. A&I staff record daily price ranges and settlement prices for all futures contracts 

traded on the Exchange. Each day, staff calculate and record changes in settlement prices by 

comparing the current day’s settlement price with the previous day’s settlement price, and 

calculate the spread differential by comparing the current day’s settlement price in deferred 

months to the spot month settlement price for each commodity. 

Staff monitor intermarket spread relationships by comparing daily price ranges and 

settlement prices for MGEX hard red spring wheat contracts to daily price ranges and settlement 

prices on the wheat markets of the Chicago Board of Trade (“CBOT”) and Kansas City Board of 

Trade (“KCBT”), as well as to the daily price ranges and settlement prices for the HWI contract 

traded on MGEXpress. Similar monitoring of spread relationships for MGEX’s electronicallytraded NCI, NSI and HWI contracts is done by comparing daily price ranges and settlement 

prices for those contracts with daily price ranges and settlement prices for CBOT corn futures, 
10

CBOT soybean futures and KCBT wheat futures, respectively. A&I staff also track changes in 

these spread relationships which may occur over time. If aberrations in relationships are found, 

A&I staff investigate to determine possible reasons for the discrepancies and evaluate the effect 

on the market and the nearby contract month. No significant price abnormalities were noted in 

any MGEX market during the target period. 

In addition to monitoring price movements and spread relationships for wheat futures and 

options, A&I staff also monitor cash grain prices collected by the U.S. Department of 

Agriculture, which are displayed on the Exchange’s web site. A&I also monitors news which 

could affect prices and spread relationships. For this purpose, staff regularly consult a variety of 

online news services, including Ag Online and Agriculture.com, DTN, Reuters, and Future 

Source. 

3. Deliverable Supplies

A&I monitors deliverable supply for the Exchange’s hard red spring wheat contract, its 

only active contract involving delivery, through the weekly Stocks of Grain Report prepared by 

the Exchange. This report details the deliverable, non-deliverable (including ungraded), and 

Commodity Credit Corporation (“CCC”) stocks of grain held in Exchange-approved warehouses 

for the Minneapolis-St. Paul-Red Wing, Minnesota, and the Duluth-Superior, Minnesota, 

switching areas, which are the delivery points for the spring wheat contract. For comparative 

purposes, the report also includes figures from the previous week and for the same week during 

the previous year. A&I staff prepare the report as of each Friday, using data compiled from 

required reports submitted by grain elevator operators on MGEX Form 38M, and the Exchange 

releases the report the following Tuesday. 

If significant changes in deliverable supply are observed, such as a variance of ten 

percent up or down, A&I staff contact the cash market participants involved to verify the 
11

accuracy of the supply information and the reason for the change. A&I also monitors reports 

disseminated by the Port of Duluth-Superior concerning outgoing tonnage of grain shipped from 

the port, and reports concerning rail shipments of grain to the three delivery points. These 

reports are monitored weekly on a routine basis, and daily during contract expiration months. 

Each licensed public grain warehouse in the two switching districts is also required to 

transmit a weekly report of all grain stocks to the MGEX Weighing Department. The Weighing 

Department compiles the information submitted into one report, which it shares with A&I. A&I 

compares this information with the Stocks of Grain Report in order to detect any significant 

discrepancies. No significant discrepancies were identified during the target period. 

 4. Heightened Surveillance Of Expiring Contracts

A&I intensifies surveillance of expiring contracts in an effort to facilitate orderly 

liquidations. The heightened surveillance typically begins when a futures contract becomes the 

nearby contract, or on the first day of the month prior to the month in which an option contract 

expires.7

 During the target period, all MGEX futures and options contracts were liquidated in an 

orderly manner. 

Surveillance of expiring contracts focuses on close monitoring of the size of large trader 

positions relative to total open interest, size and ownership of deliverable supply, and the 

positions of other large traders. A&I reviews the Open Share Of Market Report and Volume 

And Open Interest By FCM Report for potential concentrations of positions among clearing 

members. Staff closely monitor the three largest long and short position holders in the nearby 

futures month. If a clearing member has 75 percent or more of the open market share in an 

expiring contract, A&I will generally contact the clearing member to determine the intentions of 

 

7

 For example, increased surveillance of the December 2003 spring wheat futures contract began in the last week of 

September 2003 when the September 2003 spring wheat futures contract expired, and enhanced surveillance of the 

December 2003 spring wheat option contract began on November 1, 2003. 
12

the clearing firm’s customers, and to ensure that customers with short positions are capable of 

making deliveries. 

Staff also identify position holders and evaluate their ability to make or take delivery 

through review of the Account Name Position Analysis Report, which lists reportable position 

holders by name, account number(s), net position and percentage of market held, for each 

contract and contract month. This report is routinely generated and reviewed each week. To 

determine whether there is an adequate supply of grain with dispersed rather than concentrated 

ownership, and to review whether concentrated ownership could make the market susceptible to 

manipulation, A&I also compares open interest in expiring contracts with MGEX’s weekly 

Stocks of Grain Report. 

To heighten review of expiring options, A&I reviews the Delta Position Large Trader 

Report on a weekly basis and more frequently, when needed. The report lists all options traders 

holding reportable options positions, setting forth the number of options held by each trader, the 

nature of the position (long or short, put or call), the designation of commercial or 

noncommercial use, the carrying FCM, the CFTC reportable ID number, the delta, and the 

futures equivalent.8 The report allows A&I to monitor the largest options holders for both house 

and customer accounts. 

A&I tracks exercise of options through the Exercise Trade Register Report, which lists 

options positions exercised on the prior business day. This report details the clearing member, 

premium, quantity bought or sold, and the exercise dollar amount. Exercise information is also 

available through the Report of Exercises published daily by the clearinghouse, which lists each 

clearing member’s exercised options positions. The clearinghouse sends an Options Expiration 

 

8

 An options delta represents the amount an option’s premium will change for a given change in the underlying 

futures price. The futures equivalent of an options position is equal to the gross open interest times the delta. 
13

Reminder memo to each clearing member about a week prior to expiration, in order to remind 

clearing members of the requirements for options expiration. Pursuant to MGEX Regulations, 

the clearinghouse automatically exercises in-the-money options, unless notice to cancel 

automatic exercise is given by the carrying clearing member to the clearinghouse. Each clearing 

member also receives the In-The-Money Report Summary, which details for each in-the-money 

option the FCM code, the name of the house or customer holding the option, the number of long 

or short contracts held, and the settlement price of the expiring contract. A&I verifies that the 

clearinghouse received a written notification from the carrying clearing member in the event that 

an in-the-money option is not automatically exercised. 

B. Large Trader Reporting And Speculative Limit Enforcement

 A&I monitors reportable futures and options positions by reviewing the Account Name 

Position Analysis Report and the Delta Position Large Trader Report, which list each reportable 

account and position by clearing member. A&I staff also receive a report of reportable positions 

in futures and options via encrypted email from the Commission’s Kansas City office on a 

weekly basis, and can request additional updates when needed.9

 A&I uses all of these reports to 

monitor the activity of large traders and identify possible position concentrations that could 

disrupt the market. 

The majority of MGEX market participants are agribusiness firms that utilize MGEX 

contracts for hedging purposes. Other market participants who engage in speculative trading 

rarely, if ever, approach the speculative limits for futures or options positions. However, A&I 

staff monitor clearing members’ open positions for potential speculative limit violations by 

reviewing the Open Share Of Market reports for futures contracts and the Delta Position Large 

 

9

 The Commission’s large trader reporting system uses data filed by FCMs and clearing firms under Parts 16 and 17 

of the Commission’s Regulations. 
14

Trader Report for options contracts. No individual accounts approached speculative limits 

during the target period. Should a speculative limit violation be detected, an investigation will 

be initiated and the matter referred to a disciplinary committee for further review and possible 

action. 

C. Monitoring Of EFP Transactions

Exchange rules permit the exchange of futures for physical commodities (“EFPs”), at 

prices mutually agreed to by the two parties to the transaction.10 EFPs executed on MGEX are 

typically used by commercials who have hedged their cash positions in the futures market. 

During the target period, EFPs at MGEX involved 152,821 spring wheat futures contracts, or 

more than 14% of the Exchange’s total spring wheat futures volume. Trade data for EFP 

transactions are submitted to the clearinghouse and must include the clearing member, price, 

quantity, commodity, contract month, and the appropriate symbol identifying the trade as an 

EFP. 

A&I reviews EFPs during its annual audit trail reviews of each clearing member. As part 

of each audit trail review, A&I staff request the underlying documents for all EFPs transacted by 

the clearing member, such as confirmations, invoices and warehouse receipts, and reviews them 

to verify that the transactions are bona fide and that the necessary cash transaction 

documentation exists. A&I retains copies of the documents in its audit trail review file. 

A&I also reviews EFPs in conjunction with its daily review of the Exchange’s trade 

register, the Time Audit Report (“TAR”), for possible trading violations. A&I staff look for 

EFPs with unusual characteristics that may warrant investigation, such as EFPs that show the 

same account on both sides, involve unusual large quantities, or are priced outside the daily 

 

10 MGEX Rules 719.00 and 2057.00. Under these rules, if the price for an EFP is not mutually agreed to by the date 

of shipment, the cash grain buyer has the option to set the price within that day’s trading range. 
15

trading range. If irregularities are found, A&I will contact the clearing member or account 

owner to request documentation verifying the bona fides of the EFP. 

Under both of these procedures for review of EFPs, A&I found no EFPs that warranted 

investigation during the target period. Division staff reviewed A&I’s files concerning 

examination of EFPs during audit trail reviews and also found no EFP irregularities. The files 

contained copies of appropriate underlying documents, and investigation reports reflected A&I’s 

findings. 

 D. Conclusions And Recommendations

The Division found that MGEX maintains an adequate market surveillance program. The 

Exchange conducts daily market surveillance to identify possible price manipulation or distortion 

and to ensure orderly liquidation of expiring contracts. In so doing, the Exchange monitors 

volume and open interest, the relationship between cash and futures prices, spread and basis 

relationships, size and ownership of deliverable supply, and the size of large trader positions 

relative to total open interest and deliverable supply. Exchange staff also monitor the bona fides 

of EFP transactions. The Division has no recommendations in this area. 

V. AUDIT TRAIL PROGRAM

A. Recording of Trade Data

 1. Open Outcry Orders

 At MGEX, customer orders for open outcry trading are recorded on order tickets 

prepared by clearing member staff. Each order ticket must include an account identifier and 

order number, and be timestamped upon receipt of the order.11 Upon execution, the broker 

 

11 MGEX Rule 756.00. 
16

records the essential trade data on the order ticket and returns it to the clearing firm’s desk on the 

trading floor, where it is timestamped again.12

MGEX floor members record transactions for their own accounts on double-sided, preprinted, sequenced trading cards, with buys on one side and sells on the other. For each trade, 

the trading card must contain essential trade matching data and the transaction time to the nearest 

minute.13 Members must record purchases and sales in non-erasable ink, in exact chronological 

order of execution, on sequential lines of the trading card without skipping lines between trades 

and must cross out any remaining lines on the trading card. Opening and closing periods must 

also be identified. Trading cards are collected by clearing members within 15 minutes of each 

designated 30-minute trading interval. 

 Clearing members submit trade data from order tickets and trading cards to the MGEX 

clearinghouse through the Exchange’s automated Trade Data Entry And Matching System 

(“TEMS”), by keying the data into TEMS computer terminals located in clearing firm booths on 

the trading floor. Trade data must be entered into TEMS within 45 minutes of the conclusion of 

each 30-minute interval.14

 

 

12 In some instances, an independent broker may record the fill of a customer order on his or her trading card rather 

than on the order ticket. When this occurs, the broker turns in the trading card and the order ticket involved (which 

are normally cross-referenced to each other) to the clearing member at the same time. 

13 The trade data required include the commodity, quantity, date, identity of the executing and opposite brokers, 

contract month, and price (or, in the case of spreads, the differential). For option trades, the trading card must also 

show the premium and a put/call indicator. See MGEX Rule 2062.00. 

14 MGEX Resolution 2101.00.C. 
17

2. MGEXpress Orders

Orders for electronic trading on MGEXpress can be entered only by authorized clearing 

members.15 Customers wishing to place orders for electronic trading may do so by submitting 

the order to a clearing member by telephone or otherwise. Clearing member staff can enter 

orders into MGEXpress only after logging on to an MGEXpress terminal and entering a unique 

user identification as well as a password. If an order cannot immediately be entered into the 

trading system, the member must prepare a written order ticket containing the terms of the order, 

the account identifier, and required timestamps. Customer orders must be entered before orders 

are placed for accounts in which the member has a personal, financial or proprietary interest.16

MGEXpress matches all orders according to an algorithm which gives priority to orders 

at the best price and to orders with the same price according to the time they were entered into 

the system.17 The trading system automatically records all keystrokes entered and the time of 

their entry. This information is maintained on the LogB record and provides the Exchange with 

a complete audit trail of each transaction. The time of each transaction recorded into the system 

cannot be altered and no order can be erased from the LogB record. Although an order may be 

cancelled or changed, the original order is always retained and the trading system records the 

identification of the MGEX authorized user making changes or canceling the order. 

B. Trade Timing For Open Outcry Trades

MGEX requires the floor brokers on both the buy and sell sides of each transaction to 

record the time of execution, to the nearest minute, on the brokers’ trading cards (for personal 

 

15 As stated earlier, MGEXpress was operational during the target period. Trading was suspended in July 2004. 

16 MGEX Rule 1806.00. 

17 Changes to an order which do not affect the conditions for the algorithm (including reduction of quantity and 

changes of validity time, open or close indicator, client or account identifier, and free text) are allowed without loss 

of priority in the order book. All other order modifications, such as an increase of quantity or change in price, are 

handled as a deletion of the existing order and an entry of a new order with a new order number and timestamp.
18

trades) or the order tickets involved (for all other trades).18 As noted earlier, this information is 

entered into TEMS by clearing member staff. The brokers on each side of a trade must also give 

immediate verbal notice of the price at which the trade has been executed to the Exchange’s floor 

staff, who enter the reported trade price into MGEX’s price reporting system. The system 

displays the price on the board above the pit and includes it in the Exchange’s Time and Sales 

Report (“time and sales”). 

The Exchange monitors compliance with its requirement that trade times be accurate 

within one minute through daily automated review of its trade register, the TAR. The TAR 

details all trades in chronological order and contains time and sales data. It automatically 

compares the time reported for all cleared trades with the times listed in time and sales data, to 

determine whether the trade times submitted by clearing members from their trading records are 

verified by the prices and times of execution recorded in the time and sales.19

A&I reviews all trades listed in TAR exception reports concerning potential trade timing 

inaccuracies, in order to enforce MGEX’s trade timing rules and to calculate the Exchange’s 

trade timing accuracy rate. MGEX calculates trade timing accuracy for each side of a trade. If 

one side but not the other is flagged with an error code, the execution time of the side with the 

error code is deemed inaccurate and the time recorded by the error-free side is accepted as 

accurate. If an error code applies to both sides of a trade, both sides are counted as inaccurate. 

 

18 MGEX Rules 2062.00 and 2063.00. 

19 The TAR generates five timing error exception reports which identify execution times which may have been 

reported inaccurately. The five error codes are: Bought Side-No Trade (“BNT”), where no trade is indicated in time 

and sales data within one minute of the time recorded by the buyer; Sold Side-No Trade (“SNT”), where time and 

sales shows no trade within one minute of the time recorded by the seller; Time Out of Limits (“TOL”), where data 

comparison verifies the times recorded by both buyer and seller, but there is more than one minute between the two 

times; Bought Side-Untimed Trade (“BUT”), where a trade has cleared without a transaction time on the buy side; 

and Sold Side-Untimed Trade (“SUT”), where a trade has cleared without a transaction time on the sell side. 
19

Each floor broker’s timing error rates are recorded in the Broker Error Type Report 

(“BETR”). A&I reviews daily, weekly, and monthly data in the BETR to assess the accuracy of 

each member’s manually-recorded execution times. If A&I finds that a member’s trade timing 

error rate exceeds specified thresholds, A&I examines the underlying trade documents as well as 

the time and sales data and determines the “audited” error threshold.20 The “audited” rate 

includes adjustments based on the cause of timing errors, such as keypunch errors by clearing 

member personnel or an error by the observer in recording the trade. If the audited error rate is 

found to be between two and five percent, the member is sent a reminder letter. If the audited 

error rate is between five and eight percent, the member is sent a warning letter. If the audited 

timing error rate exceeds eight percent, the matter may be forwarded to a disciplinary committee 

for disciplinary action. 

 The Exchange opened and closed two investigations based on timing error rate thresholds 

during the target period.21 In both investigations, the members involved were issued staff 

reminder letters. The limited number of investigations opened based on timing error rates can be 

attributed to a continued high rate of compliance by MGEX members in recording trade 

execution times. The Exchange’s monthly timing accuracy rate for all spring wheat futures and 

options transactions combined during the target period was approximately 96 percent.22

 

 

20 On a daily basis, a member with an overall 20% timing error rate and at least 20 timing errors will be investigated 

unless the member is already the subject of an open investigation. On a monthly basis, a member with an overall 

10% total timing error rate and at least 20 timing errors may be investigated. In addition, all trades cleared without 

trade times or which otherwise appear suspicious are investigated. 

21 Investigations 03-I-08 and 03-I-18. 

22 This accuracy rate is based on data provided by MGEX for all contracts on two representative trade dates for each 

month during the target period. 
20

C. Floor Order Tickets And Trading Cards

MGEX conducts a yearly audit trail review of each clearing member to evaluate, among 

other things, compliance with the Exchange’s order ticket and trading card recordkeeping 

requirements. A&I examines all of the clearing member’s trading cards and order tickets for one 

randomly-selected trading day. If review of trade documents for the selected date discloses 

recordkeeping issues, A&I may expand the review to include other days.23

A&I closed audit trail reviews of nine of its 13 clearing members during the target period, 

including four reviews opened prior to the target period and five opened during the target 

period.24 A&I also opened four additional audit trail reviews during the target period which 

remained open at the end of the period.25

In the course of the nine closed reviews, A&I examined a total of 315 order tickets 

prepared by the nine clearing firms and 125 trading cards prepared by 35 floor members whose 

trades were cleared by those firms on the dates selected for the reviews. These members 

accounted for 69 percent of the Exchange’s total open outcry volume during the target period. 

As a result of these reviews, the Exchange issued 30 staff reminder letters for recordkeeping, 

submission, or timestamping deficiencies. In the four reviews still open at the end of the target 

period, A&I examined order tickets and trading cards for an additional five floor members not 

included among the 35 covered in the closed reviews. These five members accounted for an 

additional 20 percent of the Exchange’s total target period open outcry volume. 

 

23 A&I also checks compliance with Exchange recordkeeping requirements by examining order tickets and trading 

cards requested in the course of trade practice investigations. 

24 The four closed investigations which were opened prior to the target period included Investigations 02-I-21, 02-I22, 02-I-24 and 02-I-25. The five closed investigations which were opened during the target period included 

Investigations 02-I-28, 02-I-29, 02-I-30, 03-I-14, 03-I-16. 

25 Investigations 03-I-25, 03-I-27, 03-I-30, and 03-I 31. 
21

 Twenty of the 60 floor members who executed spring wheat futures and options trades at 

MGEX during the target period were not reviewed in the course of the audit trail reviews 

conducted during the target period because they had not traded on the dates selected for review. 

These 20 members accounted for 11% of the Exchange’s open outcry volume. Because the 

Exchange’s system of audit trail reviews of clearing members can result in some members not 

being reviewed for substantial periods, the Division believes that the Exchange should identify 

the members not included in its regular audit trail reviews, and implement supplementary review 

procedures which ensure that the trading cards and order tickets of those members are reviewed 

within a reasonable period of time. 

In the nine closed audit trail reviews, A&I found a high rate of compliance with the 

Exchange’s recordkeeping requirements. All order tickets examined contained account 

identification, and 99 percent (311) of the order tickets included both entry and exit timestamps. 

All trading cards were written in non-erasable ink, and 99 percent (123) had transactions 

recorded in sequence, had no skipped lines, and included the date, commodity, price, quantity 

and the put or call indicator where applicable. Ninety-two percent (115) of the trading cards 

properly identified opening and closing periods. In addition, all of the trading cards indicated the 

executing and opposite clearing firms, and 98 percent (122 cards) were collected by the clearing 

member within 15 minutes of the applicable 30-minute trading interval. Finally, 90 percent 

(112) of the trading cards were preprinted with members’ identification and trading card 

sequence number, and had unused lines properly marked through. 

The Division examined A&I’s files for the nine reviews closed during the target period, 

and found that the reviews were thorough and well documented. Each file included an 

investigation summary, copies of original source documents, spreadsheets and workpapers 
22

prepared by A&I staff detailing the findings of each transaction reviewed, an investigation 

report, and copies of staff reminder letters where applicable. 

D. Safe Storage Capability

MGEX stores trade data for its open outcry trades in both electronic and hard copy form. 

Copies of each day’s TAR, time and sales, and TEMS clearing data are stored on the 

clearinghouse’s mainframe computer. The mainframe retains between one and two years’ worth 

of these data on two duplicate computer disks, one of which serves as the active disk and the 

other as a back-up. The clearinghouse also has a back-up computer, housed in another part of 

the Exchange building, which stores approximately two years of trade data on a main disk and a 

back-up disk. A copy of each day’s trade data in the clearinghouse computer is taken off-site 

each evening. In addition, each year’s trade data is recorded on tape and stored in secure office 

space at the Exchange. MGEX also retains five years’ worth of open outcry trade data in hard 

copy form, stored in a vault in the Exchange building.26

For electronic trades, MGEXpress maintains a time-indexed record of all keystrokes 

entered into the trading system on each trading day in that day’s Log B file. Copies of each 

day’s Log B file are retained on a hard disk at a facility in New York maintained by OM 

Technology AB (“OM”), which operates MGEX’s trading host under a contract with the 

Exchange. Incremental back-ups of MGEXpress trade data are made every night except on 

Fridays, when full back-ups are run. The full back-ups, which include all daily data back-ups for 

the week, are transferred weekly to an OM off-site storage facility in New Jersey, and retained 

for seven years. 

 

26 The clearinghouse has a vault for retaining hard copies of reports such as trade recapitulation sheets, position 

reports and exercise reports. A&I has a separate vault for retaining hard copies of reports such as the TAR and 

BETR. 
23

 E. Conclusions and Recommendations 

 The Division found that MGEX maintains an adequate audit trail program. The 

Exchange’s program for enforcing compliance with its one-minute trade timing rule uses a 

computerized verification program to monitor and enforce timing compliance. During the target 

period, Exchange members maintained an average open outcry trade timing accuracy rate of 

approximately 96 percent. 

 The Exchange also has adequate procedures to assess and enforce member compliance 

with its order ticket and trading card recordkeeping requirements. The Exchange typically 

reviews each clearing member’s compliance once each year, examining all order tickets and 

trading cards for one day. During the course of nine recordkeeping reviews closed during the 

target period, the Exchange found high rates of compliance with the Exchange’s various 

recordkeeping rules. However, the Division also found that floor members who do not trade on 

the date selected for an audit trail review can escape inclusion in such reviews for substantial 

periods. For example, one very active member was not the subject of an audit trail review for at 

least three years. 

 Finally, the Division found that MGEX has adequate safe storage capability for its trade 

data. The Exchange retains five years’ worth of open outcry trade data in both computerized and 

hard copy form, and retains seven years’ worth of electronic trading data. Both open outcry and 

electronic trade data are stored offsite on computer disks. 

Therefore, the Division recommends that the Exchange: 

• Identify the floor members not included in its annual audit trail reviews of clearing 

members, and implement supplementary review procedures which ensure that the 

trading cards and order tickets of those floor members are reviewed within a 

reasonable period of time. 
24

VI. TRADE PRACTICE SURVEILLANCE PROGRAM

A. Automated Surveillance System

MGEX’s Time Audit Report and Broker Error Type Report serve together as the 

Exchange’s automated trade practice surveillance system for identification of potential trading 

abuses. As stated previously, the TAR combines the details of all futures and options trades in 

chronological order with Exchange time and sales data. The TAR generates exception reports 

based on preset parameters that identify possible substantive trade practice abuses, such as wash 

trading or trading ahead.27 The BETR lists all error codes generated by the TAR for each floor 

broker. 

On a daily basis, A&I staff review all exception reports generated by the TAR, and 

review the BETR to look for patterns of exceptions concerning individual brokers. In addition to 

using the TAR and BETR, staff can also conduct customized searches of the historical trade data 

stored in the Exchange’s clearinghouse computer database. Investigators can sort these data by 

broker or account number, focusing on any time period or error code desired. Pursuant to the 

guidelines in the Exchange’s Compliance Manual, an inquiry is always conducted if ten percent 

of an individual broker’s trades on any trading day, or five percent of a broker’s trades during 

any month, appear on exception reports regarding potential substantive trade practice abuses.28

 A&I opens a formal investigation into instances of potential trade practice violations 

whenever an initial staff review of exception reports, an investigator’s analysis of trade data, a 

floor surveillance observation, or an inquiry indicates that an investigation is warranted. 

 

27 The TAR generates exception reports identifying potential instances of the following: accommodation trading, 

wash trading, buyer or seller trading ahead, money pass, invalid ring trades, invalid spread trades, price above daily 

high, price below daily low, and post settlement trade errors.

28 Inquiries are also conducted concerning trades without trade times, trades outside the day’s trading range, trades 

outside the post settlement session trading limits, and EFPs transacted more than 20 cents outside the daily trading 

range.
25

Investigations are also opened for all customer or member complaints and all referrals by the 

Commission. 

 In each investigation, A&I reviews all trades by the members involved which were 

executed during the review period selected for the investigation.29 Copies of all documents 

requested are maintained in the investigation file. If members or other witnesses are interviewed, 

an A&I staff member present at the interview prepares a written summary of what was said, 

which is also maintained in the investigation file.30 At the conclusion of an investigation, A&I 

prepares an investigation report detailing the steps taken during the investigation and the reasons 

for A&I’s determination concerning what action, if any, should be taken. 

 MGEX tracks the progress and timeliness of investigations in an investigation log 

maintained by A&I staff.31 The log lists for each investigation the investigation number, source 

(e.g., TAR review, audit trail review, or referral), date opened, date closed, staff assigned, 

completion deadline date, members investigated, rules which may have been violated, and 

actions taken as a result of the investigation. 

B. Floor Surveillance

Automated surveillance is supplemented by floor surveillance. A&I staff conduct floor 

surveillance during the openings and closings of all contracts and at three randomly selected 

times during the trading session. One staff investigator is present on the trading floor five 

minutes prior to the open and remains on the trading floor five to 15 minutes after the open. If 

trading opens on a volatile note, the staff investigator may remain on the trading floor to monitor 

 

29 Staff also examine the trading documents obtained for recordkeeping compliance. 

30 Interviewees are afforded an opportunity to review the interview summaries and note any disagreement they may 

have with its contents. The Exchange does not record interviews, and the summaries do not constitute complete 

transcripts of the interviews. 

31 Sample pages from the investigation log are attached in Appendix 2. 
26

the trading until volume activity subsides. At the close, the staff investigator will be present on 

the trading floor approximately 15 minutes before the closing bell and will remain on the trading 

floor several minutes after the post-settlement session. When they conduct floor surveillance, 

investigators look for indications of, among other things, trades executed prior to the opening or 

after the close, disclosure of orders, noncompetitive trading, improper bidding or offering and 

transactions not executed by open outcry. 

The Exchange documents floor surveillance in two logs. Floor surveillance activities are 

documented in the “market log,” which notes the date and time period when floor surveillance 

was conducted, prices and price changes, possible trading infraction observed, and current 

market conditions. The badge numbers of traders present on the trading floor during several oneminute time periods during the time floor surveillance is conducted are listed in the “pit 

population log.” This log can be used by A&I to verify who was on the floor at the time of a 

particular trade.32

C. Adequacy of Investigations

The Exchange closed 35 trade practice investigations during the target period, including 

six opened prior to the target period and 29 opened during the target period. Eight additional 

investigations opened during the target period remained open at its conclusion. All 35 closed 

investigations, and seven of the eight investigations still open at the end of the target period, 

resulted from the Exchange’s surveillance programs. One of the open investigations resulted 

 

32 During the target period, six non-substantive investigations were opened based on floor surveillance observations 

by A&I or trading floor staff. Investigation 03-I-26 resulted in a $125 fine against a floor broker for use of an 

earpiece connected to a cell phone while in the trading pit, in violation of Exchange rules. Investigations 03-I-03, 

03-I-04, and 03-I-05 resulted in issuance of letters of reprimand concerning violations of MGEX’s decorum and 

dress rules, and Investigation 03-I-22 resulted in a letter of reprimand for violation of Exchange rules regarding 

uncommercial conduct. Investigation 03-I-10 resulted in issuance of staff reminder letters to two members 

concerning appropriate behavior during the open and close. 
27

from a Division referral.33 Of the 35 closed investigations, 14 (40%) resulted from automated 

surveillance exceptions, 10 (29%) resulted from floor surveillance and referrals by Trading Floor 

Operations Department staff, nine (26%) resulted from routine audit trail reviews of trading 

cards and order tickets, and two (5%) resulted from review of clearinghouse delivery notices. 

Six of the 35 closed investigations involved potential trade practice violations of a 

substantive nature, including noncompetitive trading, wash trading, prearranged trading, or 

trading ahead of customer orders. One of the eight investigations still open at the end of the 

target period also involved possible substantive trade practice violations. In addition, five 

investigations closed during the target period (including one of the six closed investigations into 

possible substantive violations) and one open investigation involved possible violations of the 

Exchange’s transfer trade rules. 

With one exception, the Division’s review of the 35 closed investigations found that 

investigations were thorough. Investigators requested, obtained, and reviewed pertinent trading 

documents in a timely fashion, and made proper analyses. Each file contained a cover sheet 

summarizing the investigation, copies of relevant computer-generated reports, copies of trading 

records, workpapers, interview summaries (where applicable), past disciplinary history, an 

investigation report, and copies of disciplinary letters. 

The investigation that was not sufficiently thorough concerned potential wash trading by 

a trader who entered 28 orders for several accounts.34 The orders were matched against each 

other, some for the same account, which resulted in the trades appearing as possible wash trades 

on the Exchange’s exception report. Upon identifying the trades, A&I did not expand its review 

to include trades for these accounts on additional days. Division staff did review additional 

 

33 No customer complaints were received during the target period. 

34 Investigation 03-I-20. 
28

trading days and found a pattern of similar trades, which were subsequently referred to the 

Exchange. As a result of the referral, the Exchange opened a second, related investigation into 

the trades, which involved additional orders placed by the same trader and two additional traders. 

A&I closed both investigations after concluding that the orders involved were executed in 

accordance with Exchange rules and were not violative. The Division believes, however, that 

A&I should have expanded its initial investigation at the outset to include a review of trading for 

the accounts involved on additional days, in order to determine whether a pattern of similar 

potential violations existed. 

 D. Timeliness of Investigations

The Division also examined the 35 investigations closed during the target period for 

timeliness, and found that all of them were closed in a timely manner. All 35 investigations were 

closed within five months after they were opened. In the 2001 Review, the Division 

recommended that the Exchange complete investigations in a more timely manner. The present 

review indicates that the Exchange has complied with this recommendation. 

 E. Conclusions and Recommendations 

 The Division found that MGEX maintains an adequate trade practice surveillance 

program. Exchange staff conduct daily review of computer-generated exception reports 

concerning all trading at the Exchange in order to identify instances of potential trade practice 

violations requiring further inquiry or investigation. Exchange staff also conduct daily floor 

surveillance of open outcry trading at both the open and the close and at various times during the 

trading day. With one exception, the Exchange’s investigations were thorough. In addition, all 

investigations were well documented and included appropriate analyses. Finally, all 

investigations were completed in a timely manner. 
29

 The Division believes, however, that an Exchange investigation into possible wash 

trading should have been more thorough. When the Exchange found 14 instances of possible 

wash trading by a trader on a single day, it should have expanded its investigation at the outset to 

review trading activity for the accounts involved on additional days, to determine whether a 

pattern of similar potential violations existed. 

Therefore, the Division recommends that the Exchange: 

• Expand the scope of its investigations to include additional trading dates when 

review of exception reports suggests the possibility of trading violations 

VII. DISCIPLINARY PROGRAM

 A. Disciplinary Committees and Procedures

 The Exchange has two disciplinary committees, the Futures Trading Conduct Committee 

(“FTCC”) and the Business Conduct Committee (“BCC”). The FTCC has jurisdiction over 

matters concerning futures and option trading, including consideration of possible trading 

violations, while the BCC has jurisdiction over all other potential violations, such as registration 

issues, clearing house matters, position limits and margins.35 The disciplinary committees do not 

have a regular meeting schedule, but meet on an as-needed basis when called to do so by the 

Vice President for Market Administration after he approves an A&I recommendation that a 

matter be brought before one of the committees. 

 

35 The FTCC consists of seven members, including the Chairperson of the Board of Directors (“Board”), the 

Exchange President, and five members of the Exchange appointed by the Chairperson. The BCC is comprised of 

the Chairperson of the Board, the Chairperson of the Clearinghouse Committee, the Exchange President and four 

members appointed by the Chairperson of the Board. Pursuant to Exchange rules, the FTCC and BCC must include 

at least one committee member who is not a member of the Exchange in all cases where the subject of a proceeding 

is a member of the Board, the BCC, or the FTCC, or where the allegations involve either price manipulation or 

financial harm to a nonmember. A BCC or FTCC member may not participate as a member of the Committee if the 

member has a financial, personal, or prejudicial interest or concern in the matter before the Committee. The 

Committees determine whether any of their members have such an interest or concern. 
30

 Upon receiving an investigation report, a disciplinary committee may issue a notice of 

charges, issue a warning or reminder letter, direct A&I to gather additional information, or 

determine that no reasonable basis exists for taking disciplinary action. A notice of charges sets 

forth the alleged violation and the exchange rules believed to have been violated, and advises the 

respondent of his right to a hearing. The respondent has 10 days to file a written response and to 

request a hearing. Failure to do so is deemed to be an admission of the charges and a waiver of 

the right to a hearing. At the discretion of the disciplinary committee, A&I may be given 

authority to negotiate or enter into a settlement with the respondent after a notice of charges has 

been issued. 

 Following a hearing, the disciplinary committee may take disciplinary action, or close the 

case based upon a finding that no violation occurred. If the committee finds that there has been a 

violation, it may issue a letter of reprimand, a monetary fine, a suspension from membership, or 

a recommendation to the Board for expulsion. Any suspension of 30 days or more, any fine of 

$10,000 or more, or any expulsion, is subject to approval by the Board.36

 A&I can also issue staff reminder letters (“SRLs”) and staff warning letters (“SWLs”) 

administratively for infractions of recordkeeping, decorum, or other similar rules, without the 

matter being referred to a disciplinary committee. All SRLs and SWLs are recorded in 

investigation files, and become part of the recipients’ disciplinary histories. 

 B. Adequacy of Sanctions Imposed

 During the target period, no substantive trade practice matters were referred to the FTCC. 

The Exchange referred 11 investigations involving non-substantive violations to the BCC. Five 

of the 11 investigations involved violation of rules governing transfer trades; two involved 

 

36 The respondent can appeal the findings or penalty imposed by the Committee to the Board. However, appeals are 

heard at the discretion of the Board. The Board’s decision on the appeal is based on the record of the hearing. If the 

respondent does not file an appeal, the penalty becomes effective on the date set forth in the Committee’s decision.
31

inaccurate reports to the clearing house; two involved nonpayment of exchange fees; one 

involved failure to meet working capital and net worth requirements; and one involved decorum 

violations. The BCC issued Notices of Charges in all 11 cases. Nine cases were concluded by 

settlements, and hearings were held in the remaining two cases. 

 In the 11 cases, MGEX assessed fines totaling $14,325. The fines imposed ranged from 

$125 to $4,500.37 They included a total of $11,000 in fines assessed against four clearing 

members for transfer trade violations; $1,200 in fines against one member for failure to pay 

required fees and deposits; a $1,000 fine assessed against a member for financial and reporting 

requirement violations; a total of $1,000 in fines assessed against two clearing members for 

submitting inaccurate delivery notices; and a $125 fine against a member for decorum violations. 

 A&I issued seven staff warning letters and 43 staff reminder letters during the target 

period.38 Two SWLs were issued for electronic trading system security violations, and one was 

issued for misuse of the electronic trading system.39 Four SWLs and 43 SRLs were issued for 

recordkeeping violations. A&I also issued five letters of reprimand for decorum violations. 

 

37 One fine of $4,500 and one fine of $3,000 were each imposed for transfer trade violations in two cases considered 

together by the BCC. In each instance, only one of the two cases belonged to the target period. 

38 In the 2001 Review, the Division recommended that MGEX enforce its limits on repeated SRLs and SWLs 

involving MGEX Rule 725.01, which requires prompt reporting of the price of all pit transactions to the Exchange’s 

market observers. The Division reviewed the SRLs and SWLs issued during the target period for violations of this 

rule, to determine whether they were in accordance with Exchange guidelines. Six SRLs and one SWL issued 

during the target period involved violations of Rule 725.01. All seven letters were issued in accordance with 

MGEX’s guidelines governing sanctions for violations of Rule 725.01. 

39 In the matter involving the electronic trading system, a clearing member employee logged on to MGEXpress 

under the user name of another employee of the member, with the consent of the second employee. The actions of 

both employees violated Exchange rules regarding electronic trading security. 
32

 C. Timeliness of Disciplinary Proceedings 

 Of the 11 investigations referred to the BCC during the target period, seven were handled 

in a timely fashion once the decision was made to submit the matter to the BCC. Six 

investigations were presented to the BCC within approximately one month of the date they were 

closed by A&I, and one was presented to the BCC within approximately two months of the date 

it was closed. Disciplinary action was completed in these seven matters within approximately 

one to three months of their receipt by the BCC. 

 With respect to the remaining four investigations, the disciplinary process was less than 

timely. Investigation 02-I-26 was not forwarded to the BCC until more than six months had 

passed after it was closed by A&I.40 Investigations 03-I-06, 03-I-09, and 03-I-11 were not 

forwarded to the BCC until approximately four months after they were closed, and charges were 

not issued in those cases until more than three additional months had passed after the BCC 

received them.41 

 D. Conclusions And Recommendations

 The Division found that MGEX maintains an adequate disciplinary program. Exchange 

disciplinary committees are convened when the Exchange determines at the conclusion of an 

investigation that charges should be brought against a member for rule violations. Exchange 

rules ensure due process for disciplinary hearings 

 No substantive trade practice matters were referred to disciplinary committees during the 

target period. MGEX referred 11 investigations involving non-substantive violations to 

disciplinary committees, imposing fines totaling $14,325. 

 

40 Investigation 02-I-26 was closed by A&I in April 2003, but was not presented to the BCC until October, 2003. 

The disciplinary process was then concluded in approximately an additional three months. 

41 Charges were also delayed for approximately two months after BCC receipt of Investigation 03-I-12, for which 

the disciplinary process was otherwise reasonably timely, having been completed within four months after A&I 

closed its investigation.
33

 The Division also found that MGEX’s disciplinary process was less than timely with 

respect to approximately one third of the investigations presented to the BCC. Untimely 

disciplinary proceedings can diminish deterrence and reduce self-regulatory effectiveness. When 

disciplinary proceedings are delayed for extended periods of time after investigations are 

concluded, proof can become problematic as memories fade and witnesses may become less 

available. 

 The Division therefore recommends that the Exchange: 

• Ensure that investigations are presented to the appropriate disciplinary committee 

promptly after they are closed with a recommendation for disciplinary proceedings, 

and that charges are issued promptly after a disciplinary committee determines that 

charges should be issued. 

VIII. DISPUTE RESOLUTION

 MGEX provides dispute resolution services for resolving disputes between Exchange 

members and their customers through its Customer Claims Arbitration program (“arbitration 

program”). Customers of Exchange members can submit any dispute arising out of a trade made 

on the Exchange for arbitration by filing a written complaint with the Exchange within two years 

after the date of the transactions from which the dispute arose. If a customer files an arbitration 

complaint, participation in the arbitration is mandatory for the member involved under Exchange 

rules. 

 Complaints are arbitrated by a Customer Claims Arbitration Panel consisting, of three 

Exchange members whose principal business activity is related to futures and options trading. 
34

Members are appointed to serve on the Panel by the Exchange’s President or Secretary.42 All 

proceedings are governed by the standards of the American Arbitration Association. 

 Written complaints, answers, and replies are served on both parties. Each side must 

cooperate in voluntary exchange of relevant documents and information, and the Exchange must 

make available any relevant documents in its possession.43

 Complaints are heard in a hearing before the Panel, at which each party has the right to be 

represented by counsel and to present statements and question witnesses under oath. The Panel 

must issue a decision in writing as soon as practicable after the hearing. Decisions must be based 

on the record of the hearing, and are final and binding on the parties. No appeal is permitted 

except where required under applicable law. 

 During the target period only one matter was submitted by a customer for arbitration. 

The dispute concerned payment for a rail car hopper used for shipping grain, and a question as to 

whether the hopper was damaged before it was received. The arbitration panel ruled that the 

complainants had failed to present sufficient evidence to support their claim. 

 The Division found that MGEX maintains an adequate dispute resolution program, and 

has no recommendations in this area. 

 

42 Members may not serve on a Panel for any matter with respect to which they have any conflict of interest, and ex 

parte contact with Panel members by either side during the proceedings is not permitted. 

43 In case of disputes regarding document production, the Panel has the power to subpoena documents it deems 

relevant.