MARKET SURVEILLANCE 

RULE ENFORCEMENT REVIEW

OF THE 

MINNEAPOLIS GRAIN EXCHANGE, INC.

Division of Market Oversight

June 5, 2015
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I. Rule Enforcement Review Scope

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

of the market suveillance program of the Minneapolis Grain Exchange, Inc. (“MGEX” or 

“Exchange”).

1

The Division’s review of the Exchange’s market surveillance program covered 

the period from April 15, 2013 to April 14, 2014 (“target period”).

2

The Division reviewed the 

Exchange’s compliance with Core Principle 2 (Compliance With Rules),3 Core Principle 4

(Prevention of Market Disruption),

4

and Core Principle 5 (Position Limitations or 

 

1 Rule enforcement reviews, and the resultant reports prepared by the Division, are intended to present an analysis of 

an exchange’s compliance capabilities during the period under review. Such reviews deal only with exchange 

programs directly addressed in the review and do not assess all programs, core principles, or Commission 

regulations. The Division’s analyses and conclusions are based, in large part, upon the Division’s evaluation of a 

sample of market surveillance files and other exchange documents. This evaluation process, in some instances, 

identifies specific issues with particular exchange compliance programs or methods, but is not designed to uncover 

every instance where an exchange fails to effectively comply with the core principles or Commission regulations. 

This report, and the analyses and conclusions herein, represent the view of the Division only, and do not necessarily 

represent the position or view of the Commission or of any other office or division of the Commission. The 

Division’s analyses and conclusions in this report are limited to MGEX.

2 The Division notes that as part of this rule enforcement review it also conducted a follow-up to the Division’s 2013 

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

determine whether the Exchange implemented the Division’s recommendations that focused on audit trail and trade 

practice surveillance (available at 

http://www.cftc.gov/ucm/groups/public/@iodcms/documents/file/rermgex090613.pdf). The Division found that 

MGEX appropriately implemented the Division’s recommendations.

3 Core Principle 2 - Compliance With Rules: (A) In general – The board of trade shall establish, monitor, and 

enforce compliance with the rules of the contract market, including: (i) Access requirements; (ii) The terms and 

conditions of any contracts to be traded on the contract market; and (iii) Rules prohibiting abusive trade practices on 

the contract market. (B) Capacity of contract market. The board of trade shall have the capacity to detect, 

investigate, and apply appropriate sanctions to any person that violates any rule of the contract market. (C) 

Requirement of rules. The rules of the contract market shall provide the board of trade with the ability and authority 

to obtain any necessary information to perform any function described in this section, including the capacity to carry 

out such international information-sharing agreements, as the Commission may require.

4 Core Principle 4 - Prevention of Market Disruption: The board of trade shall have the capacity and responsibility 

to prevent manipulation, price distortion, and disruptions of the delivery or cash-settlement process through market 

surveillance, compliance, and enforcement practices and procedures, including: (a) methods for conducting real-time 

monitoring of trading; and (b) comprehensive and accurate trade reconstructions.
3

Accountability)

5

under Section 5(d) of the Commodity Exchange Act (the “Act”), as amended by 

the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010,

6

and the 

Commission’s related regulations codified in §§ 38.155, 38.158, 38.250-256, and 38.300-301, 

which relate to an exchange’s market surveillance program.

7

To evaluate the Exchange’s market surveillance program, and its compliance with Core 

Principles 2, 4, and 5 and Commission Regulations §§ 38.155, 38.158, 38.250-256, and 38.300-

301, Division staff interviewed compliance officials and staff from the Exchange’s Department 

of Audits and Investigations (“A&I”) and received a demonstration of the automated surveillance 

systems used by the Exchange to conduct market surveillance. The Division also analyzed 

responsive documents produced by the Exchange’s staff, including the following:

 the Exchange’s market surveillance procedures manual and guidelines;

 automated computer reports and other documents generated by the Exchange’s 

market surveillance tools;

 market surveillance investigation logs and files;

 organizational charts and summaries of personnel and staffing; and

 

5 Core Principle 5 - Position Limitations or Accountability: To reduce the potential threat of market manipulation or 

congestion (especially during trading in the delivery month), the board of trade shall adopt for each contract of the 

board of trade, as is necessary and appropriate, position limitations or position accountability for speculators. For 

any contract that is subject to a position limitation established by the Commission, pursuant to section 4a(a), the 

board of trade shall set the position limitation of the board of trade at a level not higher than the position limitation 

established by the Commission.

6 Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 (2010) 

(“Dodd-Frank Act”). Title VII of the Dodd-Frank Act became effective on July 16, 2011. 

7 On May 10, 2012, the Commission issued its Final Rules, Core Principles and Other Requirements for Designated 

Contract Markets, 77 Fed. Reg. 36612 (June 19, 2012) (“New DCM Regulations”), which became effective prior to

the target period on October 17, 2012, to codify rules in lieu of guidance and acceptable practices for certain core 

principles, including Core Principles 2, 4, and 5. Because the New DCM Regulations were in effect for the entirety 

of the target period, the Division reviewed the Exchange’s market surveillance program for compliance with the 

New DCM Regulations.
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 minutes of disciplinary committee, Board of Directors, and Regulatory Oversight 

Committee meetings held during the target period.

The Division analyzed the Exchange’s market surveillance program to determine whether 

the program complies with the core principles and Commission regulations stated above, and 

whether there are any deficiencies in or recommendations for the program. For purposes of rule 

enforcement review reports, a deficiency is an area where the Division believes an exchange is 

not in compliance with a Commission regulation and must take corrective action and a 

recommendation concerns an area where the Division believes the exchange should improve its 

compliance program. 

As set forth below, the Division found that the Exchange maintains experienced market 

surveillance staff and an adequate market surveillance program to demonstrate compliance with 

Core Principles 2, 4, and 5, and Commission Regulations §§ 38.155, 38.158, 38.250-256, and 

38.300-301. The Division did not identify any deficiencies. The Division made two 

recommendations for improvement.

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

draft of this report on April 29, 2015. On May 7, 2015, Division staff conducted an exit 

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

II. Products and Trading Volume During the Target Period

Total trading volume at MGEX during the target period was 1,786,406 contracts, an 

average of 148,867 contracts per month. In the 12-month period since the target period, the 

Exchange’s total trading volume was 2,149,094 contracts, a monthly average of 179,071

contracts. MGEX offered 14 products for trading during the target period, but two products 

accounted for nearly all of the total volume. Hard Red Spring Wheat (“HRSW”) futures and 
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options products accounted for 98.5 percent and 1.3 percent of the total volume, respectively.8 

The Apple Juice Concentrate (“AJC”) futures and options contracts traded on a limited basis and 

collectively accounted for 0.2 percent of the total volume.9 

Electronically traded futures and options for both the HRSW and AJC contracts traded on 

Globex, the CME Group, Inc.’s (“CME Group”) electronic trading platform accounted for 

approximately 83 percent (1,482,455 contracts) of the Exchange’s volume during the target 

period. Additionally, HRSW options contracts traded in a room located at the Exchange’s 

headquarters contributed one percent (16,427 contracts) to the Exchange’s total volume. The 

remaining 16 percent (287,524 contacts) consisted of off-exchange transactions.

III. Summary of Findings, Deficiencies Requiring Corrective Action, and Recommendations 

A. Findings without Deficiencies Requiring Corrective Action or Recommendations

1. Compliance Staff and Resources (Core Principle 2, Commission Regulation §

38.155)

 The Division found that the Exchange has sufficient market surveillance staff to 

demonstrate compliance with Core Principle 2 and Commission Regulation § 38.155. 

The Exchange’s market surveillance program is conducted by four A&I staff 

investigators and is jointly headed by the Chief Regulatory Officer (“CRO”) and the 

Exchange’s Chief of Staff.

 

2. Prevention of Market Disruption and General Requirements (Core Principle 4, 

Commission Regulations §§ 38.250-251)

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

to comply with Core Principle 4 and Commission Regulations §§ 38.250-251 (and as 

discussed below, Core Principle 5 and Commission Regulations §§ 38.158, 38.250-

256, and 38.300-301). 

 

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In addition to the HRSW contracts, the Exchange offered electronic trading for five agricultural index futures and 

options contracts during the target period: National Corn Index, National Soybean Index, Hard Red Spring Wheat 

Index, Hard Red Winter Wheat Index, and Soft Red Winter Wheat Index. These products are offered for trading on 

Globex and had no trading volume during the target period and to date.

9 The AJC contracts were launched on August 13, 2012 and are offered for trading on Globex.
6

 The primary tool used by the Exchange to collect and evaluate daily market activity is 

the Daily Market Surveillance Log (“DMSL”). The information on the DMSL is 

obtained from computer-generated reports and is used by A&I to identify possible 

price manipulation or price distortion and to increase the surveillance of expiring 

contracts. For real-time market monitoring, A&I uses several automated tools 

including a CME Group subscription-based application called EOS Trader that 

enables A&I to monitor market activity for price variations, including prices in a 

contract month that are not moving in correlation with other contract months, as well 

as large volume increases.

3. Additional Requirements for Physical-Delivery Contracts (Commission 

Regulation § 38.252)

 The Division found that MGEX has adequate procedures to demonstrate compliance 

with Commission Regulation § 38.252. A&I monitors convergence between the 

contract price and the underlying commodity, particularly going into the delivery 

month, by downloading the USDA Marketing Services cash price statistics and 

reviewing prices of the HRSW contract for the front and nearby months as well as the 

front month price for the Chicago Board of Trade and Kansas City wheat contracts to 

compare the intermarket spreads. As expiration approaches, A&I reviews the Open 

Share of Market Report and Volume and Open Interest by Clearing Member Report 

to closely monitor the gross house and customer positions (futures) and the Delta 

Position Large Traders Report (options) to detect problems of potential concentration 

of positions among clearing members. In addition, A&I monitors the availability of 

deliverable supplies to ensure an orderly liquidation for both the HRSW and AJC 

contracts. 

4. Additional Requirements for Cash-Settled Contracts (Commission Regulation § 

38.253)

 The Division found that MGEX has adequate procedures to demonstrate compliance 

with Commission Regulation § 38.253. The Exchange offers electronic trading for 

five agricultural index futures contracts that are cash-settled: National Corn Index, 

National Soybean Index, Hard Red Spring Wheat Index, Hard Red Winter Wheat 

Index, and Soft Red Winter Wheat Index. As noted above, there was no volume in 

these contracts during the target period. A&I’s Training Manual includes appropriate 

procedures to monitor the pricing of each index to which the contracts will settle. 

5. Ability to Obtain Information (Commission Regulation § 38.254)

 The Division found that the Exchange has adequate rules to obtain information from 

market participants. MGEX Rule 2009.00. (Records of Transactions) requires 

Exchange members and market participants to retain full, complete and systematic 

records of their activity and MGEX Rule 283.00. (Audits and Investigations) provides 

the Exchange with the authority to collect this information.
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6. Risk Controls for Trading (Commission Regulation § 38.255)

 The Division found that MGEX has adequate rules and procedures to demonstrate 

compliance with Commission Regulation § 38.255. Pursuant to a Services 

Agreement with the CME Group, MGEX is responsible for determining with respect 

to all MGEX Globex contracts (1) when a trading halt, delayed opening, or other 

suspension of trading is required; and (2) when trading should resume or open, as a 

result of regulatory requirements, market conditions or other emergencies. MGEX is 

also responsible for determining when a trade cancellation or modification is required

for all MGEX Globex contracts. The Exchange rules also provide for a nonreviewable range for all MGEX contracts.

 Globex includes functionality to minimize excessive price movements, including stop 

spike logic and a price banding mechanism. Stop spike logic introduces a momentary 

pause in matching (reserved state) when triggered stops would cause the market to 

trade outside predefined values (i.e., non-reviewable range). The price banding 

mechanism subjects all incoming orders to price verification and rejects all orders 

with clearly erroneous prices.

7. Trade Reconstruction (Commission Regulation § 38.256)

 The Division found that MGEX has the ability to comprehensively and accurately 

reconstruct trading. A&I receives a daily audit data file from the CME Group called 

the “GAT file” that includes all electronic trade activity and serves as the Exchange’s 

electronic audit trail. A&I can also access complete audit trail data for both 

electronic and open outcry trading from the Exchange’s Market Surveillance 

Database.

8. Position Limitations and/or Accountability (Core Principle 5, Commission 

Regulations §§ 38.300-301)

 Subject to the recommendation below under Commission Regulation § 38.301 

regarding the Exchange’s hedge exemption application process for the HRSW futures 

contract, the Division found that the Exchange has adequate rules and procedures 

related to position limits. The Exchange adopted the federal position limits for the 

HRSW contract contained in Commission Regulation § 150.2. With respect to 

detecting position limit violations, A&I receives daily large trader information 

(“Large Trader Report”) for the HRSW contract from the Commission. The Large 

Trader Report is an Excel spreadsheet sent via FTP which lists MGEX accounts that 

reached the reporting levels for futures and/or options. A&I uses the large trader 

information to monitor positions, position holders, and distinguish speculative 

positions from hedge positions. For the AJC contract, MGEX Rule 5411.00. 

(Position Limits) specifies the position limits. MGEX monitors all AJC positions and 

position holders through various tools including the Customer Gross Margin Report.

9. Investigations and Investigation Reports (Commission Regulation § 38.158) 
8

 A&I opens a formal investigation, after the CRO’s approval, whenever daily market 

surveillance, a customer or trader complaint, or a Commission referral indicates the 

possibility of a violation of Exchange rules, the Act, or Commission regulations. 

A&I reviews material from the underlying investigation or complaint. In addition, 

A&I collects and analyzes other relevant data, including trade data, audit trail 

information, and/or the various computer-generated from the DMSL.

 The Division reviewed a total of 12 market surveillance investigations, including all 

11 investigations that were closed by the Exchange during the target period, and one 

investigation that was opened during the target period and closed after the target 

period. Subject to the recommendation below concerning the sufficiency of 

documentation for investigations, the Division found that MGEX adequately 

conducted investigations. The Division found the quality of the investigative work to 

be thorough and complete and the investigations were closed in a timely manner. 

B. Findings with Recommendations

1. Position Limitations and Accountability (Commission Regulation § 38.301)

 The Exchange does not have a rule that provides a hedge exemption application 

process for the HRSW futures contract. The Exchange informed the Division that 

MGEX did not receive any hedge exemption requests during the target period and 

such a request would be rare. The Exchange should consider adopting a hedge 

exemption application process in the Exchange’s rulebook for the HRSW futures 

contract which sets forth the process. Without such a process, there is no way for a 

market participant to request an exemption. 

o Recommendation: The Exchange should consider adopting a hedge 

exemption application process in the Exchange’s rulebook for the Hard Red 

Spring Wheat futures contract.

2. Investigations and Investigation Reports (Commission Regulation § 38.158)

 The Division found that the Exchange generally maintains adequate documentation of 

its investigations, including pertinent underlying trade documents, correspondence, 

computer reports, and summaries of the activity examined. The Division did identify 

one investigation out of the 12 investigations it reviewed where A&I did not fully 

document its analysis in either the investigation report or the investigation file. First, 

A&I did not document a complete trade reconstruction of the market activity 

surrounding the trade in question (e.g., active bids, offers, status of the order book). 

Instead, A&I only provided the daily price statistics and related-orders activity. 

Second, A&I did not indicate whether the “related-orders” were the only active orders 

before and at the time of the trade in question. Third, A&I did not include the 

Account Name Position Analysis Report that A&I used to verify the conflicting 

nature of the account identified as a Customer Type Indicator Code 4 (i.e., customer) 
9

on the order details and as a house account on delivery-related documents. Without 

such documentation, it is difficult to assess the sufficiency of the Exchange’s 

investigation and whether closing the investigation with no action was appropriate. 

o Recommendation: The Exchange should take appropriate measures to 

ensure that all market surveillance investigations are well-documented.

The accompanying Compliance Matrix in Section IV below includes a thorough analysis 

of the Exchange’s compliance with Core Principles 2, 4, and 5 under Section 5(d) of the Act, and

the Commission’s related regulations codified in Commission Regulations §§ 38.155, 38.158, 

38.250-256, and 38.300-301.
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IV. Compliance Matrix

CFTC Regulation Findings Regarding the Exchanges’ Compliance

Target Period 4/15/13 – 4/14/14

Deficiencies/Recommendations

§ 38.155 Compliance staff and 

resources (market surveillance)

(a) Sufficient compliance staff. A 

designated contract market must

establish and maintain sufficient

compliance department resources and

staff to ensure that it can conduct

effective audit trail reviews, trade

practice surveillance, market

surveillance, and real-time market

monitoring. The designated contract

market’s compliance staff also must 

be sufficient to address unusual 

market or trading events as they arise, 

and to conduct and complete

investigations in a timely manner, as 

set forth in § 38.158(b) of this part.

(b) Ongoing monitoring of 

compliance staff resources. A 

designated contract market must 

monitor the size and workload of its 

compliance staff annually, and ensure 

that its compliance resources and 

staff are at appropriate levels. In 

determining the appropriate level of 

compliance resources and staff, the 

designated contract market should 

consider trading volume increases, 

the number of new products or 

contracts to be listed for trading, any 

new responsibilities to be

MGEX’s market surveillance responsibilities are carried out by the

Department of Audits and Investigations (“A&I”) which consists of

four staff investigators and is jointly headed by the Chief 

Regulatory Officer (“CRO”) and the Exchange’s Chief of Staff.

The Division found that the Exchange maintains sufficient A&I 

staff to conduct market surveillance. 

The CRO reports to the Regulatory Oversight Committee (“ROC”) 

and is primarily responsible for overseeing A&I’s performance of 

its self-regulatory responsibilities, including management of the 

Exchange’s market surveillance, audit trail, trade practice 

surveillance, disciplinary, and dispute resolution programs. The 

CRO reviews investigations prepared by A&I staff investigators, 

assesses surveillance matters, and evaluates and administers 

disciplinary actions such as warning letters and settlements. The 

Chief of Staff reports to the President of the Exchange and is 

primarily responsible for overseeing A&I administrative matters.

These responsibilities include hiring investigators, conducting 

annual A&I employee performance evaluations, and assigning and 

monitoring the timeliness of A&I work.

The current CRO served as CRO from 2009 to May of 2012 and 

was reappointed in April of 2013. The Chief of Staff joined 

MGEX in 1996 and was appointed Chief of Staff in 2005. A&I 

staff investigator experience ranges from one to eight years. 

A&I staff levels are monitored regularly by the CRO and the Chief 

None
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assigned to compliance staff, the 

results of any internal review 

demonstrating that work is not 

completed in an effective or timely 

manner, and any other factors 

suggesting the need for increased 

resources and staff.

of Staff. In addition, the ROC evaluates A&I staff levels and 

resources via an annual report that considers, among other things, 

A&I staff turnover, qualifications, and compensation.

Core Principle 4 Prevention of Market Disruption

§ 38.250 Core Principle 4

The board of trade shall have the 

capacity and responsibility to prevent 

manipulation, price distortion, and 

disruptions of the delivery or cashsettlement process through market 

surveillance, compliance, and 

enforcement practices and 

procedures, including:

(a) Methods for conducting real-time 

monitoring of trading; and

(b) Comprehensive and accurate 

trade reconstructions.

See discussion below addressing Commission Regulations §§ 

38.251-256.

None

§ 38.251 General 

requirements

A designated contract market must:

(a) Collect and evaluate data on 

individual traders' market activity on 

an ongoing basis in order to detect 

and prevent manipulation, price 

distortions and, where possible, 

disruptions of the physical-delivery 

or cash-settlement process;

Collecting and Evaluating Data to Detect and Prevent Manipulation 

and Price Distortions

The primary tool used by the Exchange to collect and evaluate 

daily market activity is the Daily Market Surveillance Log 

(“DMSL”). The information on the DMSL is obtained from 

computer-generated reports and is used by A&I to identify possible 

price manipulation or price distortion and to increase the 

surveillance of expiring contracts. Reports maintained on the 

DMSL include: 

None
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(b) Monitor and evaluate general 

market data in order to detect and 

prevent manipulative activity that 

would result in the failure of the 

market price to reflect the normal 

forces of supply and demand;

(c) Demonstrate an effective program 

for conducting real-time monitoring 

of market conditions, price 

movements and volumes, in order to 

detect abnormalities and, when 

necessary, make a good-faith effort to 

resolve conditions that are, or 

threaten to be, disruptive to the 

market; and

(d) Demonstrate the ability to 

comprehensively and accurately 

reconstruct daily trading activity for 

the purposes of detecting trading 

abuses and violations of exchange-set 

position limits, including those that 

may have occurred intraday.

 Open Share of Market Report – identifies the top three 

position holders in the two front month contracts for Hard 

Red Spring Wheat (“HRSW”) and Apple Juice Concentrate 

(“AJC”); 

 Trading Activity Surveillance – identifies the number of 

brokers/User IDs traded for each futures and options 

contract; 

 Trade Totals – shows the buy and sell activity for each 

commodity; 

 Deliveries/Exercises – identifies the deliveries and option 

exercises that occurred in each commodity; 

 Large Traders – identifies the top five traders’ volume, 

percentage of volume, number of trades and percentage of 

total trades for each commodity;

 Broker vs. Broker – identifies brokers with a volume greater 

than 100 contracts and where more than 30 percent of the 

broker’s total volume is opposite another broker;

 Broker vs. Clearing Member – identifies brokers with a 

volume greater than 100 contracts and where more than 30 

percent of the broker’s total volume is with one clearing 

member;

 Option Surveillance – identifies volume for all strike prices 

that were opened for each contract month and commodity 

(on the business day);

 Open Interest – identifies the front month, total open 

interest, and volume change for HRSW and AJC futures and 

options; and 

 Volume – identifies the total volume traded for both futures 

and options for all commodities.

As part of its daily surveillance responsibilities, A&I monitors the 

availability of deliverable grade grain for the HRSW contract and 

apple juice concentrate for the AJC contract, in relation to open 
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interest and concentrations of positions. A&I also monitors 

unusual price relationships and/or price volatility in the expiring 

contract month, which might indicate manipulation or supply 

pressures on the market. A&I uses the Settlement Manipulation 

Report to analyze market activity during the closing period and any 

time period throughout the trading day. This report enables A&I to 

view price and order activity to identify any large orders entering 

the market, particularly during the closing period.

Real-Time Monitoring of the Market

With respect to real-time market monitoring, A&I uses EOS 

Trader, a CME Group subscription-based application, to monitor 

market activity for price variations, including prices in a contract 

month that are not moving in correlation with other contract 

months, as well as large volume increases. EOS Trader displays 

real-time market data for futures and options instruments and 

spreads, including best bid and ask quantity, best bid and ask price, 

and volume for each instrument and spread. A&I also uses

FirmSoft, a CME Group subscription-based order management tool 

that provides real-time access to working and filled MGEX orders. 

FirmSoft enables A&I staff to view and save relevant order 

information, including entry time, fill time, contract month, 

strategy type, and order number. Additionally, A&I uses Barchart,

a website that provides real-time price, quotes, volume, charts, and 

technical analysis for commodities, futures, stocks, options, forex, 

and ETF markets. Barchart allows A&I to view prices and 

intermarket spread relationships between MGEX, Chicago Board 

of Trade (“CBOT”) Soft Red Winter Wheat, and Kansas City Hard 

Red Winter Wheat contracts. By monitoring the price changes and 

spread relationships, A&I can detect price movements that could 

indicate an underlying problem in the market.
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Reconstructing Trading to Detect Position Limit Violations

As discussed below in the Division’s findings regarding the 

Exchange’s compliance with Commission Regulation § 38.256, 

MGEX has the ability to reconstruct both electronic and open 

outcry trading. 

MGEX adopted the federal position limits for HRSW contained in

Commission Regulation § 150.2 and MGEX Rule 5411.00. governs 

the position limits for the AJC contract (see discussion below 

concerning Regulation § 38.256 for the position limits for both 

HRSW and AJC). With respect to detecting position limit 

violations, A&I receives a daily large trader information Excel 

spreadsheet (“Large Trader Report”) for the HRSW contract from 

the CFTC via FTP. The Large Trader Report lists MGEX accounts 

that reached the reporting levels for futures and/or options. A&I 

uses the large trader information to monitor positions, position 

holders, and distinguish speculative positions from hedge positions.

If an account or owner approaches the position limits, A&I will 

monitor daily activity to ensure it does not exceed the position 

limits during the trade day or at the end of the day. For the AJC 

contract, MGEX monitors all AJC positions and position holders 

through various tools including the daily Customer Gross Margin 

Report that MGEX’s clearinghouse receives from its clearing 

members. 

A&I also uses various applications and reports to monitor for 

intraday position limit violations. Specifically, A&I reviews the 

previous day’s end-of day position report, the DMSL large traders 

table which shows the top five traders’ volume and percentage of 

volume, FirmSoft to view the orders placed by traders during the 

trading day to determine whether any positions are close to the 

Exchange’s position limits, and the Customer Gross Margin 
15

Report. 

§ 38.252 Additional 

requirements for physicaldelivery contracts

For physical-delivery contracts, the 

designated contract market must 

demonstrate that it:

(a) Monitors a contract's terms and 

conditions as they relate to the 

underlying commodity market and to 

the convergence between the contract 

price and the price of the underlying 

commodity and show a good-faith 

effort to resolve conditions that are 

interfering with convergence; and

(b) Monitors the supply of the 

commodity and its adequacy to 

satisfy the delivery requirements and 

make a good-faith effort to resolve 

conditions that threaten the adequacy 

of supplies or the delivery process.

Monitoring Convergence Between the Contract Price and 

Underlying Commodity

A&I monitors convergence, particularly going into the delivery 

month. Specifically, A&I downloads the USDA Marketing 

Services cash price statistics; reviews prices of the HRSW contract 

for the front and nearby months as well as the front month price for 

the CBOT and Kansas City wheat contracts from Barchart to 

compare the intermarket spreads; and creates graphical charts of 

futures and cash basis prices. A&I analyzes this information for 

unusual or lack of convergence and will elevate any concerns to the 

CRO. A&I did not identify any convergence issues during the 

target period. A&I also considers external factors that may impact 

the market, such as economic news, embargoes, weather, and 

domestic and foreign market crises because this information may 

have a fundamental impact on the HRSW contract and 

convergence. A&I also monitors the railcar tariffs because they are 

part of the basis amount (i.e., difference between the cash and 

futures price).

Monitoring Contract Expirations

As expiration approaches, A&I reviews the Open Share of Market 

Report and Volume and Open Interest by Clearing Member Report

to closely monitor the gross house and customer positions (futures) 

and the Delta Position Large Trader Report (options) to detect 

problems of potential concentration of positions among clearing 

members. A&I monitors the three largest long and short future 

position holders and the largest short put and call holders in the 

nearby month to ensure that futures contracts are liquidated in an 

orderly manner and that options are properly exercised. A&I also 

None
16

reviews the Account Name Position Analysis Report (“ANPAR”) 

and the Large Trader Report provided by the CFTC to monitor 

positions and position holders as expiration approaches. The 

ANPAR is particularly useful because the information assists A&I 

in identifying position holders and their ability to make or take 

delivery. If A&I has any questions or issues regarding a particular 

position it contacts the clearing firm or position holder. MGEX did 

not identify any unusual or problematic expirations during the 

target period.

Monitoring Deliverable Supplies

A&I monitors the availability of deliverable supplies to ensure an 

orderly liquidation for both the HRSW and AJC contracts. Each 

week, A&I reviews the Stocks of Grain and the Apple Juice 

Concentrate Report to determine the availability of deliverable 

grade spring wheat and apple juice concentrate in relation to open 

long positions. Both of the reports are compiled by using data 

obtained by MGEX from reports submitted by Exchange-approved 

grain elevator operators and warehouses. The reports compare 

figures from the previous week and for the same week in the 

previous year, which allows A&I to assess any adverse changes. If 

there are material changes in the deliverable supplies of 10 percent 

or more, A&I contacts the grain elevator operator or warehouse to 

verify the accuracy of the supply information and the reason for 

such a change. A&I did not identify any deliverable supply issues 

during the target period.

§ 38.253 Additional 

requirements for cash-settled 

contracts

(a) For cash-settled contracts, the 

designated contract market must 

demonstrate that it:

The Exchange offers electronic trading for five agricultural index 

futures contracts that are cash-settled: National Corn Index, 

National Soybean Index, Hard Red Spring Wheat Index, Hard Red 

Winter Wheat Index, and Soft Red Winter Wheat Index. However, 

there was no volume in these contracts during the target period. 

A&I’s Training Manual includes appropriate procedures to monitor 

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17

(1) Monitors the pricing of the index 

to which the contract will be settled; 

and

(2) Monitors the continued 

appropriateness of the methodology 

for deriving the index and makes a 

good-faith effort to resolve 

conditions, including amending 

contract terms where necessary, 

where there is a threat of market 

manipulation, disruptions, or 

distortions.

(b) If a contract listed on a designated 

contract market is settled by 

reference to the price of a contract or 

commodity traded in another venue, 

including a price or index derived 

from prices on another designated 

contract market, the designated 

contract market must have rules or 

agreements that allow the designated 

contract market access to information 

on the activities of its traders in the 

reference market.

the pricing of each index to which the contracts will settle. 

The Exchange does not offer any contracts for trading that are 

settled by reference to the price of a contract or commodity traded 

in another venue.

§ 38.254 Ability to obtain 

information

(a) The designated contract market 

must have rules that require traders in 

its contracts to keep records of their 

trading, including records of their 

activity in the underlying commodity 

and related derivatives markets, and 

make such records available, upon 

request, to the designated contract 

market.

The Exchange maintains two rules that provide the Exchange with 

the authority to obtain information from market participants:

 MGEX Rule 2009.00. (Records of Transactions) – Requires

Exchange members and market participants to retain full, 

complete and systematic records of their activity, including 

records in the underlying commodity and related derivatives 

markets as well as related cash and forward transactions.

 MGEX Rule 283.00. (Audits and Investigations) – Provides

the Exchange with the authority to collect information and 

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(b) A designated contract market with 

participants trading through 

intermediaries must either use a 

comprehensive large-trader reporting 

system (LTRS) or be able to 

demonstrate that it can obtain 

position data from other sources in 

order to conduct an effective 

surveillance program.

documents and the authority to examine books and records 

kept by any market participant from whom information has 

been requested.

As noted above with respect to the Exchange’s compliance with 

Commission Regulation § 38.251, the Exchange receives daily 

large trader information for the HRSW contract from the CFTC and 

position information for the AJC contract in the Customer Gross 

Margin Report that MGEX’s clearinghouse receives from its 

clearing members daily. The Large Trader Report lists MGEX 

accounts that reached the reporting levels for futures and/or 

options. The Large Trader Report also contains the account 

identification, expiration date, amount of futures and/or option 

positions (long or short, puts or calls), designation of commercial 

or noncommercial, the strike price, the account code and the

reporting firm alpha name. 

§ 38.255 Risk controls for 

trading

The designated contract market must 

establish and maintain risk control 

mechanisms to prevent and reduce 

the potential risk of price distortions 

and market disruptions, including, 

but not limited to, market restrictions 

that pause or halt trading in market 

conditions prescribed by the 

designated contract market.

Electronic Trading and Services Agreement with CME Group and 

Globex Functionality

A Services Agreement entered into by MGEX and CME Group 

prescribe the responsibilities of each party in the event of an 

electronic trading halt, delay, or suspension. Pursuant to the 

Services Agreement, MGEX is responsible for determining with 

respect to all MGEX Globex contracts (1) when a trading halt, 

delayed opening, or other suspension of trading is required and (2) 

when trading should resume or open, as a result of regulatory 

requirements, market conditions or other emergencies. MGEX is 

required to provide the CME Global Command Center (“GCC”) 

with as much advance notice of the halt, delay or suspension, and 

of the time when trading shall resume, as is practicable under the 

circumstances, and CME shall use commercially reasonable efforts 

to control trading in accordance with such instructions. During the 

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19

target period, MGEX experienced a trading halt on April 8, 2014, 

that was initiated by the GCC due to Globex technical issues. 

The Services Agreement also provides that MGEX is responsible 

for determining with respect to any MGEX Globex Contract, when 

a trade cancellation or modification is required as a result of 

regulatory requirements, market conditions or other emergencies in 

accordance with the requirements of MGEX rules. In such event, 

MGEX must provide the GCC with as much advance notice of the 

trade cancellation or modification as is practicable under the 

circumstances, and CME shall use commercially reasonable efforts 

to comply with the instructions. The non-reviewable range for 

HRSW is $.10 per bushel and $.20 per gallon for AJC. There were 

no trade cancellations or modifcations during the target period.

Globex includes functionality to minimize excessive price 

movements. For example, stop spike logic introduces a momentary 

pause in matching (reserved state) when triggered stops would 

cause the market to trade outside predefined values (i.e., nonreviewable range). Globex also includes a price banding 

mechanism that subjects all incoming orders to price verification 

and rejects all orders with clearly erroneous prices.

Open Outry Trading 

For open outcry trading, MGEX uses its price reporting system and 

Trade Entry Matching System (“TEMS”) to enforce price limits. 

The pit reporter monitors prices and will prevent a quote above or 

below the daily price limit to be disseminated to the public through 

its price reporting system. Trades entered into TEMS with prices 

above or below the daily price limits, which are not reported to the 

pit reporter, may not clear. The Exchange did not identify any 

open outcry trades that cleared outside the daily price limits during 
20

the target period.

§ 38.256 Trade reconstruction

The designated contract market must 

have the ability to comprehensively 

and accurately reconstruct all trading 

on its trading facility. All audit-trail 

data and reconstructions must be 

made available to the Commission in 

a form, manner, and time that is 

acceptable to the Commission.

CME Globex, the Exchange’s electronic trading platform, 

maintains a complete electronic record of all orders entered and all 

transactions executed, including the terms and time of entry for 

each order, all order modifications/cancellations, and all matched

trades. A&I receives a daily audit data file from the CME Group 

called the “GAT file” that includes all electronic trade activity and 

serves as the Exchange’s electronic audit trail. Additionally, A&I 

uses FirmSoft to access information regarding working and filled 

MGEX orders on Globex and previously cleared trade activity. 

FirmSoft also provides A&I with the ability to search real-time and 

prior electronic trade activity by various methods, including: 

account number, User ID, order type, and client order ID for the 

current trade date and the last five trading sessions. A&I can also 

access complete audit trail data for both electronic and open outcry 

trading from the Exchange’s Market Surveillance Database. 

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Core Principle 5 Position Limitations or Accountability

§ 38.300 Core Principle 5

To reduce the potential threat of 

market manipulation or congestion 

(especially during trading in the 

delivery month), the board of trade 

shall adopt for each contract of the 

board of trade, as is necessary and 

appropriate, position limitations or 

position accountability for 

speculators. For any contract that is 

subject to a position limitation 

established by the Commission, 

pursuant to section 4a(a), the board of 

trade shall set the position limitation 

of the board of trade at a level not 

higher than the position limitation 

established by the Commission.

As noted above in the discussion regarding the Exchange’s

compliance with Commission Regulation § 38.251, MGEX adopted 

the federal position limits contained in Commission Regulation § 

150.2 for the HRSW contract. Therefore, the position limits are 

600 contracts in the spot month and 12,000 contracts for a single 

month and all-months-combined. For the AJC contract, MGEX 

Rule 5411.00. (Position Limits) provides for position limits of 100 

contracts in the spot month and 1,000 contracts in a single month

and all-months-combined. The daily Large Trader Report the 

Exchange receives from the CFTC enables A&I to identify any 

accounts that appear to be approaching a speculative position limit. 

For the AJC contract, MGEX monitors all AJC positions and 

position holders through various tools including the Customer 

Gross Margin Report. If A&I identifies an account of concern, 

staff will contact the respective clearing member to obtain further 

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21

information as deemed appropriate. During the target period, the 

Exchange did not have any market participants that approached or 

exceeded the position limits in either HRSW or AJC.

§ 38.301 Position limitations 

and accountability

A designated contract market must 

meet the requirements of parts 150 

and 151 of this chapter, as applicable.

As noted above, MGEX has adopted limits for the HRSW and AJC

contracts. For the HRSW options contract and AJC futures and 

options contracts, MGEX rules provide a formal application 

process for market participants to request a hedge exemption from 

position limits. The application must include certain information 

including a description of the size and nature of the proposed 

transactions and information that will demonstrate that the 

proposed transactions are bona fide hedging transactions. The 

Exchange does not have a rule that provides a hedge exemption 

application process for the HRSW futures contract. MGEX 

informed the Division that the Exchange did not receive any hedge 

exemption requests during the target period and such a request 

would be rare. The Exchange should consider adopting a hedge 

exemption application process in the Exchange’s rulebook for the 

HRSW futures contract. Without such a process, there is no way 

for a market participant to request an exemption. 

Recommendation

The Exchange should consider 

adopting a hedge exemption 

application process in the Exchange’s 

rulebook for the Hard Red Spring 

Wheat futures contract.

§ 38.158 Investigations and 

investigation reports

(a) Procedures. A designated contract 

market must establish and maintain 

procedures that require its 

compliance staff to conduct 

investigations of possible rule 

violations. An investigation must be 

commenced upon the receipt of a 

request from Commission staff or 

upon the discovery or receipt of 

information by the designated 

contract market that indicates a 

reasonable basis for finding that a 

Investigation Procedures

A&I opens a formal investigation, after the CRO’s approval, 

whenever daily market surveillance, a customer or trader 

complaint, or a Commission referral indicates the possibility of a 

violation of Exchange rules, the Commodity Exchange Act, or 

Commission regulations. When an investigation is initiated, it is 

assigned a file reference number and additional information 

relevant to the investigation is entered into a computerized 

database, including among other things, the start date of the 

investigation, individual(s) or entity(ies) under investigation, the 

investigator assigned to the investigation, source of the 

investigation, potential rule violation(s), and a short summary 

See below, under “Conduct of 

Investigations” for a 

recommendation related to 

documentation for investigations.
22

violation may have occurred or will 

occur.

(b) Timeliness. Each compliance staff 

investigation must be completed in a 

timely manner. Absent mitigating 

factors, a timely manner is no later 

than 12 months after the date that an 

investigation is opened. Mitigating 

factors that may reasonably justify an 

investigation taking longer than 12 

months to complete include the 

complexity of the investigation, the 

number of firms or individuals 

involved as potential wrongdoers, the 

number of potential violations to be 

investigated, and the volume of 

documents and data to be examined 

and analyzed by compliance staff.

(c) Investigation reports when a 

reasonable basis exists for finding a 

violation. Compliance staff must 

submit a written investigation report 

for disciplinary action in every 

instance in which compliance staff 

determines from surveillance or from 

an investigation that a reasonable 

basis exists for finding a rule 

violation. The investigation report 

must include the reason the 

investigation was initiated; a 

summary of the complaint, if any; the 

relevant facts; compliance staff's 

analysis and conclusions; and a 

recommendation as to whether 

disciplinary action should be pursued.

(d) Investigation reports when no 

reasonable basis exists for finding a 

explaining why the investigation was initiated. 

A&I reviews material from the underlying investigation or 

complaint. Additionally, A&I collects and analyzes other relevant 

data, including trade data, audit trail information, and/or the various 

computer-generated data from the DMSL. Information is also 

collected from market participants through document requests and 

interviews are conducted with the relevant individual(s) or 

entity(ies) under investigation. 

All information pertinent to an investigation is maintained in a 

physical file folder. The folder includes staff work product, 

correspondence, documentation of interviews, reports related to the 

investigation, and documents and/or exhibits supporting any 

allegations noted during an investigation. The Exchange maintains 

computer-generated documents such as interview requests and 

interview summaries in an electronic file. 

Investigation Disposition

Investigations are closed by a staff investigator subject to review by 

a peer investigator and the CRO for final review. An individual 

from the Exchange’s Legal Department may also be asked to 

review an investigation before it is closed. When A&I concludes 

that no reasonable basis exists for finding a rule violation, the 

investigation is closed with no action. If A&I is unable to 

determine whether a reasonable basis exists for finding a rule 

violation, A&I will refer the matter to the Disciplinary Committee 

for review. Where rule violation(s) are found and A&I seeks to 

impose a sanction greater than a warning letter or summary fine, 

the investigation is referred to the Disciplinary Committee. In all 

cases when investigations are closed, A&I prepares an investigation 

report which includes the reason(s) the investigation was initiated, 
23

violation. If after conducting an 

investigation, compliance staff 

determines that no reasonable basis 

exists for finding a violation, it must 

prepare a written report including the 

reason(s) the investigation was 

initiated; a summary of the 

complaint, if any; the relevant facts; 

and compliance staff's analysis and 

conclusions.

(e) Warning letters. No more than 

one warning letter may be issued to 

the same person or entity found to 

have committed the same rule 

violation within a rolling twelve 

month period.

a summary of the complaint and any rules potentially violated, the 

relevant facts, and A&I’s conclusions.

Closed Investigations 

The Division reviewed a total of 12 market surveillance 

investigations, including all 11 investigations that were closed by 

the Exchange during the target period, and one investigation that 

was opened during the target period and closed after the target 

period. 

Of the 12 closed investigations (some included more than one 

potential rule violation), five involved MGEX Rule 718.01.

(Offsets and Transfer Trades in a Delivery Month), one involved 

MGEX Rule 1227.00. (Trading Session Submission), four involved 

MGEX Rule 2069.00. (Reporting Requirements and Sanctions), 

nine involved MGEX Rules 2100.00. (Method of Clearing) and 

2101.00.C. (Reporting Deadlines), and one involved MGEX Rules

732.00. (Attempt to Upset Market Prohibited) and 733.00.

(Fictitious Bids or Offers Prohibited). 

The results of the 12 closed investigations were: closed with no 

action (three); issuance of staff warning letters (two); staff 

summary fines (four); and referral to the Exchange’s Disciplinary 

Committee (three).

Timeliness of Investigations

The 12 market surveillance investigations reviewed by the Division 

were all completed in a timely manner. Counting from the time 

each investigation was initiated and ending the date the 

investigation was closed (or, for investigations which were referred 

to the Exchange’s Disciplinary Committee, the Disciplinary 
24

Committee referral date), the average length of time investigations 

were open was 76 days. Eight investigations were closed in 90 

days or less and four investigations were open for at least 90 days 

but less than 179 days. 

Conduct of Investigations

The Division reviewed the adequacy of the Exchange’s conduct in 

the 12 closed market surveillance investigations. The Division 

found the quality of the investigative work in the 12 investigations

reviewed to be thorough and complete. A&I investigators 

adequately collected, reviewed, and analyzed relevant data. In 

addition, the Division found that the Exchange’s decisions whether 

or not to pursue disciplinary action were appropriate. 

The Division also found that the Exchange generally maintains 

adequate documentation of their investigations, including pertinent 

underlying trade documents, correspondence and interviews, 

computer reports, analysis of the activity examined, and 

investigation reports. However, in the investigation closed after the 

target period, the Division found that the A&I did not fully 

document its analysis in either the investigation report or 

investigation file. First, A&I did not document a complete trade 

reconstruction of the market activity surrounding the trade in 

question (e.g., active bids, offers, status of the order book). 

Instead, A&I only provided the daily price statistics and relatedorders activity. Second, A&I neglected to indicate whether the

“related-orders” were the only active orders before and at the time 

of the trade in question. Third, A&I did not include the ANPAR

that A&I staff used to verify the conflicting nature of the account 

identified as a Customer Type Indicator Code 4 (i.e., customer) on 

the order details and as a house account on delivery-related 

documents. Such documentation is necessary for the Division to 

Recommendation

The Exchange should take 

appropriate measures to ensure that 

all market surveillance investigations 

are well-documented.
25

assess the sufficiency of the Exchange’s investigation and whether 

closing the investigation with no action was appropriate. 

Warning Letters

The Exchange issued warning letters to two respondents based on 

investigations closed during the target period for violating MGEX 

Rule 718.01. (Offsets and Transfer Trades in a Delivery Month). 

In its review of these warning letters, the Division found no 

instances in which the Exchange issued warning letters to the same 

person or entity for committing the same rule violation within a 

twelve month period.