RULE ENFORCEMENT REVIEW

OF

ICE FUTURES U.S.

Division of Market Oversight

July 22, 2014
1

Rule Enforcement Review of 

ICE Futures U.S. (“ICE Futures” or “Exchange”)

Market Surveillance Program

Commodity Futures Trading Commission – Division of Market Oversight

Target Period: June 15, 2011 to June 15, 2012

Table of Contents

I. INTRODUCTION............................................................................................................ 3

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS........................................ 7

III. PRODUCTS AND TRADING VOLUME DURING THE TARGET PERIOD........... 13

IV. EXCHANGE OVERVIEW ........................................................................................... 17

A. Ownership and Board of Directors.................................................................................... 17

B. Regulatory Oversight Committee; Budget Matters ........................................................... 18

V. MARKET SURVEILLANCE DEPARTMENT STRUCTURE AND STAFFING...... 19

A. Organizational Structure .................................................................................................... 19

B. Control Committees........................................................................................................... 20

C. Staffing and Personnel ....................................................................................................... 21

VI. MARKET SURVEILLANCE PROCEDURES AND SYSTEMS................................ 24

A. Market Surveillance Procedures Manual........................................................................... 24

B. Large Trader Reporting System......................................................................................... 25

C. Electronic Tools for Monitoring Trading .......................................................................... 26

D. Crystal Reports; ICE Report Center .................................................................................. 27

E. Data Regarding Deliverable Warehouse Receipts............................................................. 29

F. Conclusions Regarding Reporting Systems and Other Automated Tools......................... 30

VII. ROUTINE SURVEILLANCE OF MARKET FUNDAMENTALS ............................. 30

A. Monitoring For Open Interest ............................................................................................ 30

B. Monitoring For Prices and Volume ................................................................................... 32

C. Monitoring Deliverable Supply for Physically Delivered Commodities........................... 33

VIII. SURVEILLANCE OF EXPIRING CONTRACTS....................................................... 34

A. Standard Procedures for Intensified Surveillance.............................................................. 34

B. Monitoring for Price Convergence .................................................................................... 35
2

C. Expirations During the Target Period Requiring Intensified Surveillance........................ 37

IX. POSITION LIMITS AND ACCOUNTABILITY LEVELS ......................................... 38

A. Monitoring of Position Limits and Accountability Levels................................................ 38

B. Exemptions from Position Limits...................................................................................... 40

X. REVIEW OF MARKET SURVEILLANCE INVESTIGATIONS............................... 47

A. General Procedures............................................................................................................ 47

B. Review of Investigations During Target Period ................................................................ 48
3

I. INTRODUCTION1

The Division of Market Oversight (“Division”) of the Commodity Futures Trading 

Commission (“Commission”) has completed a rule enforcement review of the market 

surveillance program of ICE Futures U.S. (“ICE Futures” or “Exchange”). The review covers

the period from June 15, 2011 to June 15, 2012 (“target period”). Although the Division’s 

review primarily focused on the target period, in its analysis and recommendations the Division 

took into account post-target period changes in the Exchange’s market surveillance program.

The Division’s review focused on compliance with two core principles under Section 

5(d) of the Commodity Exchange Act (“CEA”), as amended by the Dodd-Frank Wall Street 

Reform and Consumer Protection Act (“Dodd-Frank Act”).2In particular, the Division’s review 

focused on Core Principles 4 (Prevention of Market Disruption) and 5 (Position Limitations or 

Accountability), which relate to an exchange’s market surveillance program. As set forth below, 

 

1 Rule enforcement reviews prepared by the Division are intended to present an analysis of an exchange’s 

overall compliance capabilities during the period under review. Such reviews deal only with programs 

directly addressed in the review and do not assess all programs or core principles. 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. This rule enforcement review, and the 

findings and recommendations 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.

2

See Dodd-Frank Wall Street Reform and Consumer Protection Act, Public Law 111-203, 124 Stat. 1376 

(2010). The effective date of the Dodd-Frank Act was July 16, 2011, approximately a month after the 

beginning of the target period. As a result, the Division’s review focused on Sections 5(d)(4) and 5(d)(5) 

of the CEA, as amended by the Dodd-Frank Act, because the new Core Principles 4 and 5 were in effect 

for approximately eleven months of the target period. Furthermore, 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), which became effective on October 17, 2012, after the target period. Among 

other things, this rulemaking revised guidance and acceptable practices for some core principles and, for 

several core principles such as Core Principles 4 and 5, codified rules in lieu of guidance and acceptable 

practices. See 77 Fed. Reg. 36,612, 36,614, 36,702-03. Because these rules were not in effect during the 

target period, the Division evaluated the Exchange’s market surveillance program under the pre-existing 

guidance and acceptable practices, while noting where applicable whether certain aspects of the program 

are consistent with the guidance and acceptable practices implemented by the Final Rules. 
4

the Division is making several recommendations for further action by the Exchange, including 

recommendations with respect to the procedures governing the Exchange’s Regulatory Oversight 

Committee, the Exchange’s market surveillance staffing, and the processes by which the 

Exchange regulates open interest reporting and evaluates applications for hedge exemptions. 

Core Principles Following Amendment of the CEA by the Dodd-Frank Act

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.

Core Principle 5 – Position Limitations or Accountability: 

(A) In General: 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.

(B) Maximum Allowable Position Limitation: 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.

An acceptable market surveillance program should regularly collect and evaluate market 

data to determine whether markets are responding to the forces of supply and demand. An 

exchange should also have routine access to the positions and trading of its market participants

(“MPs”). This data should be evaluated on a daily basis to enable the exchange to respond 

appropriately to potential market disruptions or abusive practices. An effective surveillance 

program for an exchange with multiple products and a substantial number of MPs should include 

an automated large trader reporting system.

To facilitate orderly liquidation of expiring contracts and minimize the potential for

expiration problems arising from excessively large positions, an exchange may need to establish 

position limits for some commodities, although it may substitute position accountability for 
5

position limits where the threat of excessive speculation or manipulation is nonexistent or very 

low. Spot month limits should be adopted for commodities that have more limited deliverable 

supplies, or where necessary to minimize a market’s susceptibility to manipulation or price 

distortion. Position limit rules may provide for hedge or other exemptions, and may set limits 

differently by markets, delivery months, or time periods. An exchange should have an effective 

program for enforcement of position limits, and should monitor the continuing appropriateness 

of approved exemptions. An exchange should also have an effective program for taking 

regulatory action when a violation of a position or exemption limit is detected, regardless of 

whether the violation is by a member or non-member.

For purposes of this review, Division staff interviewed compliance officials and staff 

from the Exchange’s Market Regulation Department (“Market Regulation”), of which the 

Market Surveillance Department (“Market Surveillance” or “MSD”) is a subset. During the 

interview, the Division received a demonstration of several electronic tools used by the 

Exchange to conduct market surveillance. The Division also reviewed numerous documents 

used by Market Surveillance in carrying out the Exchange’s market surveillance responsibilities, 

or produced for purposes of describing those responsibilities in connection with this rule 

enforcement review. These documents included, among other things, the following:

 the market surveillance procedures manuals, rulebooks and guidelines of the Exchange 

and of the Exchange’s clearinghouse, ICE Clear U.S. (the “Clearinghouse”);

 the Bylaws of the Exchange; 

 minutes of all meetings of the Exchange’s committees responsible for market 

surveillance matters that were held during the target period; 

 documents describing the automated surveillance systems used by the Exchange to 

conduct market surveillance;

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

surveillance tools;

 files and records concerning contract expirations, position accountability and speculative 

position limit enforcement, and applications for cash and carry exemptions and other

exemptions from position limits;

 files and records concerning market surveillance-related case files and research files; and

 Clearinghouse assessment letters.
6

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

draft of this report on May 27, 2014. On June 9, 2014, Division staff conducted an exit 

conference with MSD staff to discuss this report’s findings and recommendations.
7

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS

A. Market Surveillance Department Structure and Staffing

Findings 

 MSD is a subset of the Market Regulation Department. In performing its surveillance 

function, MSD relies upon the Exchange’s Commodity Operations Department and ICE 

Clear U.S., an Exchange subsidiary that serves as its derivatives clearing organization. 

MSD also relies on product-specific Control Committees for guidance on market 

surveillance issues, such as position limit exemption requests. 

 The Regulatory Oversight Committee (“ROC”) is comprised of the four directors who 

occupy the Board directorships designated in the Bylaws as the public director positions.

No tie-breaking procedures are in place to resolve differences between the four members 

if a tie were to arise. 

 MSD consisted of eight personnel at the end of the target period, out of 23 personnel 

overall in the Market Regulation Department. After the target period, the Exchange 

reassigned the duties of certain personnel in an effort to reduce the time taken to 

complete surveillance investigations.

Recommendations

 The Exchange should implement tie-breaking procedures to resolve tie votes of the ROC, 

or alternatively, the Exchange should ensure that the committee is composed of an odd 

number of members greater than one. 

 The Exchange should ensure that MSD maintains staffing sufficient to perform all of its 

surveillance responsibilities, including timely completion of surveillance investigations. 

B. Market Surveillance Procedures and Systems

Findings 

 MSD’s principal tool for monitoring positions held by large traders in the Exchange’s 

various markets is the Market Surveillance Application, which maintains large trader data 

on futures and options positions, along with account identification data, delivery notices, 

and other relevant information. MSD complements the Market Surveillance Application 

with SMARTS, a third-party surveillance application that enables MSD to monitor and 

review trading in a graphical format on a real-time basis. 
8

 MSD generates a number of reports through the Exchange’s “Crystal” application for 

purposes of monitoring market fundamentals. These include the Top Day Alert Report 

and Over Limits Alert Report, which MSD reviews to identify MPs that are near or above 

their position limits or position accountability levels. MSD also reviews various reports 

through the Exchange’s public Report Center, including a Daily Volume and Open 

Interest report and a Historical Monthly Volume report. 

 In order to monitor for open interest, MSD reviews two Crystal reports: the Firm 

Positions vs. Open Interest (OI) Spreadsheet and the OI vs Position Alert Spreadsheet. 

The OI vs Position Alert Spreadsheet was introduced in September 2013, following the 

end of the target period.

Recommendations

 The Division does not have any recommendations in this area.

C. Routine Surveillance of Market Fundamentals

Findings 

 The Exchange does not have specific protocols in place that establish when it will address 

misreporting of open interest in addition to or in lieu of the Clearinghouse. During the 

target period, both the Clearinghouse and Exchange brought sanctions for instances of 

misreporting of open interest, via Clearinghouse assessment letters and Exchange 

warning letters and sanctions, raising questions about which entity is responsible for 

investigating and sanctioning such misreporting.

 MSD uses a number of resources to analyze price and volume data, in order to detect 

unusual price movements, market congestion, or unusual volume activity, among other 

issues. 

 MSD monitors deliverable supply to avoid situations in which there is insufficient supply 

of a commodity at expiration, which can cause the commodity contract to become 

susceptible to price manipulation or distortion. MSD routinely contacts MPs to inquire 

about deliverable supply in relation to upcoming contract expirations, reviews warehouse 

stock reports, and monitors market news and various reports for information that could 

impact deliverable supplies. 
9

Recommendations

 If the Exchange intends to continue to sanction misreporting of open interest alongside 

the Clearinghouse, then the Exchange’s rulebook should set forth specific rules stating 

that open interest misreporting represents a violation of Exchange rules. Any Exchange 

sanctions for the misreporting of open interest should be sufficient to deter recidivism. 

 The role of Exchange staff in enforcing Clearinghouse requirements regarding open 

interest reporting should be formalized in the procedures manual of the Exchange. If the 

Exchange intends to continue sanctioning misreporting of open interest, it should 

maintain records of any sanctions also issued by the Clearinghouse so that it may 

properly account for recidivist behavior.

D. Surveillance of Expiring Contracts

Findings 

 MSD conducts intensified surveillance of expiring contracts in order to detect and 

prevent price manipulation and facilitate orderly liquidations, focusing on large trader 

positions and position concentrations, and the relationship between deliverable supply 

and open interest. 

 MSD monitors for price convergence in physically delivered contracts during contract 

expirations. According to MSD, it is inherently more difficult for MSD to monitor for 

price convergence in international soft products such as Coffee, Sugar and Cocoa, 

although MSD works with Control Committees and contacts large traders in an effort to 

monitor price convergence in these products.3

 The Exchange identified one contract expiration that required particular scrutiny during 

the target period: July 2011 Cotton futures contracts. In that instance, the Division 

determined that the Exchange responded appropriately to the expiration-specific market 

factors, ensured orderliness, and kept well-documented files. 

Recommendations

 

3 The Division is continuing to review the Exchange’s procedures with regard to monitoring for price 

convergence in the international soft products to determine if they are consistent with Commission 

regulation 38.252(a). 
10

 The Division does not have any recommendations in this area.

E. Position Limits and Accountability Levels

Findings 

 MSD monitors the size of participants’ positions in order to enforce speculative position 

limits. MSD may also rely on position accountability levels to instruct an MP not to 

increase its position further and/or to reduce its position to the appropriate accountability 

level, due to liquidity concerns or other concerns regarding potential negative market 

impact. 

 MSD may grant position limit exemptions for bona fide hedging, arbitrage and straddle 

transactions via written position limit request forms. Exchange Rule 6.27 permits 

Exchange members to apply for a cash and carry exemption in connection with arbitrage, 

spread and straddle strategies.4 This type of exemption is unique to the Exchange, and is 

not offered by other DCMs.

 The Exchange requires that MPs renew single month and all month hedge exemptions on 

an annual basis. MSD sends a letter to the MP in connection with this renewal, which 

requires the MP to submit a new application if relevant information has changed. If the 

MP does not respond to the letter, MSD cancels the exemption.

 The Division’s review of several exemption requests provided by the Exchange shows 

that applicants sometimes do not fill out the form completely, i.e., some questions are not 

answered, and the answers to some questions are not complete. 

 Exchange Rule 6.26 requires that MPs submitting a request for a hedge exemption 

demonstrate that the proposed transactions are bona fide hedging transactions (as defined 

in Commission regulation 1.3(z)). Notwithstanding this Exchange Rule, the Exchange 

permits MPs to support a request for a hedge exemption with unfixed-price purchases and 

sales, which do not qualify as bona fide hedging transactions under Commission 

regulation 1.3(z). When Division staff called this inconsistency to the attention of 

Exchange representatives, they agreed to propose an amendment to the Exchange 

 

4 The Division is continuing to review the effectiveness of the Exchange’s cash and carry exemptions and 

the procedure by which the Exchange grants such exemptions. 
11

Rulebook clarifying that the Exchange will offer hedge exemptions from the applicable 

Exchange position limits for positions that are determined by the Exchange to be 

consistent with the purpose of hedging, in addition to offering hedge exemptions for bona 

fide hedging positions, as defined in Commission regulation 1.3(z).

Recommendations

 The Exchange should require market participants to resubmit detailed information on at 

least an annual basis to support their single month and all month hedge exemptions. 

 Prior to granting a hedge exemption, the Exchange must ensure that applicants complete 

each question in their exemption applications. The Exchange must also ensure that 

applicants provide sufficiently detailed information to allow the Exchange to analyze the 

underlying reasons for the request, and whether those reasons are consistent with the 

requirements for the exemption sought. 

F. Review of Market Surveillance Investigations

Findings 

 The Division reviewed all 10 MSD investigations that were open during any portion of 

the target period. Four of the 10 investigations related to position limit violations, one 

investigation related to failure to comply with the restrictions of a cash and carry 

exemption granted by the Exchange, one investigation related to large trader reporting 

deficiencies, two investigations related to open interest reporting deficiencies, one 

investigation related to a rule violation in connection with several Exchange of Options 

for Options transactions, and one investigation was suspended by the Exchange upon 

being separately investigated by the Commission’s Division of Enforcement (“DOE”). 

The nine closed cases were variously resolved through Exchange warning letters and 

monetary fines, in the amount of $20,000, $25,000, $50,000 and $100,000. 

 The Division believes that the analysis performed by MSD in the course of the 10 

investigations was generally thorough, well-reasoned and sufficiently documented. The 

Exchange has recently implemented changes requiring that case numbers be assigned, 

and an investigation report be prepared, for matters that appear to involve an Exchange 

rule violation. The Division also understands that the Exchange has begun indicating the 

date on its investigation reports on which the report was approved by senior MSD staff, 
12

in response to a recommendation made by the Division in a December 2012 rule 

enforcement review of the Exchange’s disciplinary program. Finally, the Division 

believes that the sanctions imposed by the Exchange via warning letters and monetary 

fines appear generally reasonable relative to the violations alleged and evidence 

presented. 

 The average length of time between the opening and closing of the nine closed 

investigations was 288 days. One of the nine closed investigations took 501 days to 

complete with no apparent mitigating circumstances justifying the prolonged open 

period, and another closed investigation involving extended negotiations took 652 days to 

complete. 

 The Exchange informed the Division that the Market Surveillance Manager left the 

Exchange following the end of the target period. The Exchange also stated that, in an 

effort to reduce the time required to resolve surveillance investigations, the Exchange 

assigned the duties of the Market Surveillance Manager to the MSD Senior Analyst.

Recommendations

 The Division does not have any recommendations in this area.
13

III. PRODUCTS AND TRADING VOLUME DURING THE TARGET PERIOD5

Total trading volume at the Exchange during the period June 1, 2011 through June 30, 

2012 was 119,637,373 contracts. The Exchange offered 109 different products for trading 

during this period, but four products alone accounted for approximately 77 percent of total 

volume: Russell 2000 Index futures (40 percent); Sugar No. 11 futures (24 percent); U.S. Dollar 

Index futures (7 percent); and Sugar No. 11 options (6 percent). Additional trading volume and 

product information is provided in Tables 1, 2 and 3, below.6

 

5 Data in this Section was obtained from the Exchange. Note that several statistics provided by the 

Exchange cover the period June 1, 2011 through June 30, 2012, while the target period covers a slightly 

different period (June 15, 2011 to June 15, 2012). 

6 On October 15, 2012 (after the end of the target period), Intercontinental Exchange transitioned certain 

OTC energy swaps and options to futures and options. Following the transition, cleared North American 

natural gas, electrical power and physical environmental products are listed as futures and options on the 

Exchange, while cleared oil, freight, iron ore and natural gas liquids are listed as futures and options on 

ICE Futures Europe. Products transitioned to the Exchange are designated by the Exchange as ICE 

Futures Energy Division (IFED) products. See ICE Advisory memo, October 12, 2012, at 

https://www.theice.com/publicdocs/otc/advisory_notices/ICE_Advisory_10_12_003.pdf
14

Table 1 below lists the total Exchange volume during June 1, 2010 through June 30, 

2011, and during June 1, 2011 through June 30, 2012. Exchange volume is subdivided by open 

outcry/pit volume, electronic trading volume, and off-exchange volume. The number of 

products traded increased from 99 to 109 (10 percent) over this two year period,

7

but the 

Exchange experienced relatively modest volume growth (from a total volume of 117,013,652 to 

119,637,373 contracts).

Table 1.

Time period Volume (in 

contracts)

Open Outcry 

Volume

Electronic 

Volume

Off Exchange

Volume (EFP, 

EFS, EOO, 

Block)

No. of 

Products 

Traded

Futures 6-01-10 to 

6-30-11

101,227,799 1,116,404 100,111,395 5,516,066 81

Futures 6-01-11 to 

6-30-12

106,349,043 621,735 105,727,308 5,125,835 72

Options 6-01-10 to 

6-30-11

15,785,853 14,159,548 1,626,305 876,127 18

Options 6-01-2011 

to 

6-30-12

13,288,330 7,312,116 5,976,214 1,191,908 37

Total 6-01-10 to 

6-30-11

117,013,652 15,276,952 101,737,700 6,392,193 99

Total 6-01-11 to 

6-30-12

119,637,373 7,933,851 111,703,522 6,317,743 109

 

7

In May 2012, the Exchange listed cash-settled grain futures and options contracts for corn, wheat, 

soybeans, soybean oil, and soybean meal. See

https://www.theice.com/publicdocs/futures_us/exchange_notices/ExNot041212Grain.pdf
15

Table 2 below lists the names and total trading volumes for the Exchange’s five primary 

futures products (ranked by trading volume) during June 1, 2011 through June 30, 2012. Trading 

in the Russell 2000 Index, the Exchange’s most heavily traded futures product, represented

approximately 40 percent of total Exchange volume during this period.

8

Table 2.

Futures 

Product

Volume (in 

contracts)

Percentage 

of Total 

Exchange 

Volume9

Open 

Outcry 

Volume

Electronic 

Volume

Off Exchange

Volume (EFP, 

EFS, EOO, 

Block)

Avg. MonthEnd Open 

Interest

Russell 

2000 

Index

47,966,206 40% 0 47,966,206 1,294,255 423,209

Sugar 

No. 11

28,408,728 24% 246,948 28,161,780 1,606,021 630,759

U.S. 

Dollar 

Index

8,419,843 7% 19,874 8,399,969 58,289 57,956

Coffee 

“C”

6,286,827 5% 77,233 6,209,594 322,124 124,921

Cotton 

No. 2

6,220,656 5% 151,565 6,069,091 434,835 162,218

 

8 The Exchange provided updated statistics that covered the period April 1, 2013 to April 30, 2014. The 

total Exchange volume during this period was 111,057,788 contracts. During this period, the Russell 

2000 Index represented 30 percent of total Exchange volume (down from 40 percent in Table 2), and 

Sugar No. 11 represented 31 percent of total Exchange volume (up from 24 percent in Table 2). These 

were the most significant changes in the percentage composition of the individual products making up the 

total Exchange volume in futures products and in options products. 

9 As indicated in Table 1, total Exchange volume during the period from June 1, 2011 through June 30, 

2012 was 119,637,373 contracts.
16

Table 3 below lists the names and total trading volumes for the Exchange’s five primary 

options products (ranked by trading volume) during June 1, 2011 through June 30, 2012.

10

 

Trading in Sugar No. 11, the Exchange’s most heavily traded options product, represented 

approximately 6 percent of total Exchange volume during this period.

Table 3.

Options 

Product

Volume (in 

contracts)

Percentage 

of Total 

Exchange 

Volume11

Open 

Outcry 

Volume

Electronic 

Volume

Off Exchange

Volume 

(EOO, Block)

Avg. MonthEnd Open 

Interest

Sugar 

No. 11

6,842,909 6% 3,719,253 3,123,656 720,738 608,958

Coffee 

“C”

2,760,609 2% 1,546,529 1,214,080 147,157 209,062

Cotton

No. 2

2,722,449 2% 1,734,475 987,974 233,076 261,959

Cocoa 547,949 0.5% 100,352 447,597 79,550 72,467

FCOJ 189,292 0.2% 104,383 84,909 576 22,247

 

10 In October 2012, the Exchange ended floor trading for option contracts, and those contracts now trade 

exclusively on the Exchange’s electronic platform.

11 As indicated in Table 1, total Exchange volume during the period from June 1, 2011 through June 30, 

2012 was 119,637,373 contracts.
17

IV. EXCHANGE OVERVIEW

A. Ownership and Board of Directors

The Exchange is a wholly-owned subsidiary of Intercontinental Exchange, Inc. (the “ICE 

Parent”).

12

 The ICE Parent is incorporated in the state of Delaware and listed on the NYSE. ICE 

Clear U.S. is the derivatives clearing organization of the Exchange, and clears all Exchange 

contracts. Although ICE Clear U.S. is a wholly-owned subsidiary of the Exchange, it maintains 

its own membership, board of directors, officers, and operating staff. 

The Exchange is governed by its Board of Directors (the “Exchange Board”), the 

composition of which is governed by the Bylaws of the Exchange. The Bylaws are subject to 

modification by the Exchange Board and the stockholders of the Exchange in accordance with 

Article XVI of the Bylaws. The Exchange Board oversees the management of the Exchange’s 

business and its DCM self-regulatory obligations. Two individuals serve on the boards of both 

ICE Clear U.S. and the Exchange; the membership of the two boards does not otherwise overlap.

The Exchange Board consists of nine directors: (a) two individuals who are executive 

officers or directors of the ICE Parent; (b) the CEO or President of the Exchange; (c) four 

representatives who are not trading members and qualify as public directors; and (d) two other 

individuals elected by the shareholder of the Exchange.

13

 The Commission’s acceptable 

practices for DCM Core Principle 16 provide a safe harbor in the event that at least 35 percent of 

the board are public directors and other conditions are met (including that public directors meet 

qualification requirements set forth in the acceptable practices).

14

 The composition of the 

 

12 The ICE Parent operates multiple futures exchanges globally, including: ICE Futures U.S., ICE Futures 

Europe, ICE Futures Canada, NYSE Liffe US, LIFFE and ICE Singapore.

13 The Exchange has determined that the two directors elected by the shareholder of the Exchange also 

qualify as public directors.

14 As noted in the preamble to the DCM Core Principles rulemaking, “Acceptable practices are intended 

to assist DCMs by establishing non-exclusive safe harbors. The safe harbors apply only to compliance 

with specific aspects of the core principle, and do not protect the contract market with respect to charges 

of violations of other sections of the CEA or other aspects of the core principle.” 77 FR 36612 at 36614, 

note 13. The Acceptable Practices for Core Principle 16 of the CEA state that “Acceptable practices for 

minimizing conflicts of interest shall include the following elements: ... [a]t least thirty-five percent of 

the directors on a contract market’s board of directors shall be public directors.” Id. at 36720.
18

Exchange Board is consistent with these acceptable practices, as six out of nine of the members 

of the Exchange Board qualify as public directors (i.e., 67 percent).15 

B. Regulatory Oversight Committee; Budget Matters

The Regulatory Oversight Committee (“ROC”) oversees all facets of the Exchange’s 

self-regulatory program, including trade practice and market surveillance, and the conduct of 

investigations. The ROC also reviews the size and allocation of the Exchange’s regulatory 

budget and resources, and the hiring, compensation, and termination of Exchange regulatory 

personnel. Finally, the ROC prepares an annual report assessing the Exchange’s self-regulatory 

program for the Exchange Board and the Commission, which sets forth the regulatory program’s 

expenses, describes its staffing and structure, and reviews the performance of the Exchange’s 

Business Conduct Committee. The composition and activities of the ROC are governed by Rule 

3.40 of the Exchange Rulebook. 

The ROC is comprised of the four directors who occupy the Board directorships 

designated in the Bylaws as the public director positions. No tie-breaking procedures are in 

place to resolve differences between the four members if a tie were to arise. The Division is 

concerned that with an even number of members and no tie-breaking procedures, the ROC may 

be unable to reach a decision in the event of a difference of opinion between ROC members. 

Accordingly, the Division recommends that:

 The Exchange should implement tie-breaking procedures to resolve tie votes of 

the ROC, or alternatively, the Exchange should ensure that the committee is 

composed of an odd number of members greater than one. 

The members of the ROC do not have a fixed term, and there are no specific removal 

standards for its members. However, because the ROC is comprised of public directors serving 

on the Exchange Board, any such public director who ceases to be an Exchange Board director 

would automatically cease to be a ROC member.

As noted above, the ROC plays an integral role in setting the budget for the Market 

Regulation Department. The Market Surveillance budget is a subset of the larger Market 

 

15 The six public directors are the four representatives who occupy the positions designated in the Bylaws 

as public directorships, and the two directors elected by the shareholder of the Exchange. 
19

Regulation Department budget. Most of the Market Surveillance budget is dedicated to 

employee compensation. The Vice President of Market Regulation prepares the budget request 

in consultation with the General Counsel of the Exchange and the President of the Exchange. 

The Vice President then submits the budget request to the ROC. The ROC reviews the Market 

Regulation Department budget before it is submitted to the ICE Parent for approval. The Market 

Regulation Department received the budget requested during the target period, and has never 

been denied a budget that it requested.16 Once the Market Regulation Department budget is 

approved, it becomes part of the larger ICE Parent budget. 

V. MARKET SURVEILLANCE DEPARTMENT STRUCTURE AND STAFFING

A. Organizational Structure

The Exchange’s Market Regulation Department encompasses two sub-departments: the 

Market Surveillance Department and the Compliance Department. Interaction between the 

Market Surveillance Department and the Compliance Department occurs on a regular basis. 

Both the Market Surveillance and the Compliance Departments report to the Vice President of 

Market Regulation. The Vice President of Market Regulation reports to the Exchange’s General 

Counsel. 

The Market Surveillance Department principally relies upon two external departments for 

information critical to its function. First, the Exchange’s Commodity Operations Department

oversees deliveries and collects information with respect to delivery notices issued and stopped. 

The Market Surveillance Department utilizes this information during expiration periods. 

Second, ICE Clear U.S., the derivatives clearing organization for the Exchange, provides volume 

data and customer and house open interest data utilized by Market Surveillance, as discussed in 

Section VII(A)-(B) below. MSD also consults with Control Committees, as discussed in the 

following section. 

 

16 The 2012 budget (which corresponds to the calendar year) for the Market Regulation Department was 

$3,439,881. As a comparison, the 2011 budget for the Market Regulation Department was $3,474,119. 

Variances in the budget from one year to the next are typically related to changes in staffing. The Market 

Regulation Department also receives other types of support (e.g., technology and human resources) that 

are not included in the Market Regulation budget, but are instead budgeted on an Exchange-wide basis. 
20

B. Control Committees

The Market Surveillance Department relies upon “Control Committees” for guidance on 

market surveillance issues. Control Committees are established by the Exchange, and each 

Committee consists of three Exchange members. There is a Control Committee for each 

Exchange-listed product. MSD selects the three members for each product-specific Control 

Committee from a larger pool of Exchange members that have offered to serve on Control 

Committees. Members cannot serve on a Control Committee for a product that they actively 

trade. For example, an individual who trades coffee could serve on the Cocoa Control 

Committee, but could not serve on the Coffee Control Committee. 

As an example of the Exchange’s use of Control Committees, if the Exchange receives a 

number of position limit exemption requests when a contract with tight supplies is about to 

expire, MSD may ask the applicable Control Committee for a recommendation as to how to 

handle the requests. In addition, MSD may consult the Control Committees when events occur

that could result in a disorderly liquidation, including price distortions or market disruptions.17 

Exchange officials explained to the Division that recommendations made by Control Committees 

are typically respected by MPs. As a result, Exchange representatives believe that MSD’s

recommendations on a particular issue are better accepted by MPs if MSD has previously 

consulted with the relevant Control Committee. The Control Committees do not have the 

authority to make final decisions. When Division staff first interviewed Exchange 

representatives in connection with this rule enforcement review, the representatives stated that 

MSD generally takes the advice of the Control Committees. The Exchange representatives later 

clarified that MSD typically brings a proposal to the Control Committee, and the Committee 

typically agrees with the MSD proposal. During the target period, the Control Committee met 

twice in June 2011 to discuss the July 2011 Cotton expiration. The Control Committee did not 

meet at any other time during the target period. 

 The Division would be concerned if MSD is taking direction from the Control 

Committee regarding exemptions or the other issues discussed above, rather than treating the 

 

17 See the discussion of the Control Committee’s role in monitoring for price convergence in Section 

VIII(B) below.
21

Control Committee solely as a consultative body. In the view of the Division, members of the 

Control Committee might be more likely to support conduct in which they themselves engage, 

even if that conduct is not consistent with the overall quality of the market. 

The Division did not identify a failure with respect to the Exchange’s use of Control 

Committees, and did not identify any situation in which the Control Committee determined the 

outcome of an issue on which it was consulted by MSD. Nonetheless, as a general principle, the 

Division emphasizes that the Control Committee should not exercise determinative authority. 

The Division reminds the Exchange that while it may be helpful for MSD to consult with the 

Control Committee on the issues discussed above, MSD should retain ultimate authority to make 

determinations on such issues, irrespective of the views of the Control Committee. 

C. Staffing and Personnel

As noted above, the Market Surveillance Department is a subset of the Market Regulation 

Department. MSD consisted of eight personnel at the end of the target period, out of 23 

personnel overall in the Market Regulation Department. There have not been significant changes 

in staffing in the Market Surveillance Department since the 2005 Market Surveillance RER 

(which reviewed the Exchange’s predecessor NYBOT). At that time, there were also a total of 

eight fully-dedicated personnel, although the roles and responsibilities of certain personnel have 

changed in the interim.18 Market Surveillance is led by a highly experienced Vice President of 

Market Regulation (“Vice President”),19 who also leads the Exchange’s Compliance Department

 

18 See also note 6 above. After the end of the target period, Intercontinental Exchange transitioned certain 

OTC energy swaps and options to futures and options. Following the transition, cleared North American 

natural gas, electrical power and physical environmental products are listed as futures and options on the 

ICE Futures U.S. Products transitioned to the Exchange are designated by the Exchange as ICE Futures 

Energy Division (IFED) products. Staff responsible for the surveillance of these products when they were 

traded OTC continues to survey them as IFED products. A total of nine staff members survey IFED 

products. 

19 The Vice President joined the Exchange’s staff in September 2005. His 27 years of experience in 

futures compliance include 20 years with New York futures exchanges (COMEX, NYMEX, 

ICE/NYBOT) and seven years with various FCMs. 
22

and consults directly with the ROC. During the target period, the following seven individuals in 

the Market Surveillance Department reported to the Vice President of Market Regulation:20

(1) The Managing Director,21 whose duties include managing routine market 

surveillance activities and exemption requests for Coffee, Sugar, and Cocoa.

(2) The Market Surveillance Manager,22 whose duties include managing all

exemption requests except for Coffee, Sugar, Cocoa, and cash-settled grains, in 

addition to routine market surveillance activities.

(3) The Senior Analyst,23 whose duties include supporting the Managing Director and 

the Market Surveillance Manager, as well as managing exemption requests for 

cash-settled grains.

(4) The Database Analyst,24 who performs routine market surveillance activities.

(5) The Exchange of Futures for Physicals (“EFP”)/Operations Manager,25 whose 

duties include producing the monthly EFP Review and weekly Spec Hedge 

Reports, along with monitoring and calculating contract dates.

(6) The EFP/Operations Assistant, whose duties include assisting the EFP/Operations 

Manager.

(7) The Surveillance Assistant, whose duties include producing the margin 

information released by the Exchange.

 

20 Following the end of the target period, one of the two administrative assistants ceased working at the 

Exchange after the individual’s role was electronically automated. 

21 The Managing Director has 17 years of market surveillance experience and an additional seven years of 

commodities research experience. The median tenure (in years) of experience for Market Surveillance 

Department staff is 22 years. 

22 The Market Surveillance Manager has more than 38 years of market surveillance and compliance 

experience, which includes 34 years at the Exchange and several years at the CFTC and its predecessor. 

23 The Senior Analyst joined the Exchange in May 2012. The Senior Analyst has 13 years of 

commodities industry experience and is being trained in all aspects of market surveillance.

24 The Database Analyst joined the Exchange in February 2012 and is being trained in investigations and 

other aspects of market surveillance.

25 The EFP/Operations Manager has over 13 years of experience with EFP reviews and has worked at the 

Exchange for a total of 24 years in research and economics functions. 
23

The Managing Director, Market Surveillance Manager, and EFP/Operations Manager 

supervised the other members of the Market Surveillance staff during the target period. 

Additionally, a member of the Compliance Department who specializes in information 

technology is available to MSD if issues arise that require technical skills (e.g., generating

automated reports). 

In January 2013, following the end of the target period, the Exchange transferred 

responsibility for reviewing Exchange for Related Positions (“EFRP”) transactions from Market 

Surveillance to the Exchange’s Trade Practice Compliance group. The transfer was intended to 

enable the Trade Practice Compliance group to leverage its specialized investigatory and 

analytical experience when reviewing EFRPs, allowing Market Surveillance staff to focus on its

core responsibilities.26 The Exchange also revised and expanded its EFRP, block trade, and 

money pass review processes, and upgraded its surveillance reports to improve the Exchange’s 

ability to target high-risk EFRPs and block trades for closer review. Finally, the Exchange began 

providing enhanced training to MSD staff with respect to EFRPs and block trades, and filed 

documents with the Commission notifying MPs of the Exchange’s EFRP procedures. 

While the Division believes that MSD personnel are qualified and experienced, the 

Division is concerned about the potential impact of staffing changes in connection with efforts to 

reduce the time required to resolve surveillance investigations. As discussed in more detail in 

Section X(B) below, four of the nine closed investigations took over one year to complete: 424

days, 450 days, 501 days and 652 days. The Exchange informed the Division that the Market 

Surveillance Manager left the Exchange following the end of the target period. The Exchange 

also stated that, in an effort to reduce the time required to resolve surveillance investigations, the 

Exchange assigned the duties of the Market Surveillance Manager to the MSD Senior Analyst, 

who was being previously trained by MSD to take over these duties prior to the personnel 

change. In light of this reduction in staffing and personnel change within MSD, the Division 

recommends the following:

 

26 The EFP/Operations Manager remained in MSD following this reorganization, and was assigned 

additional operational responsibilities related to market surveillance. The reorganization did not result in 

any changes to the staffing of MSD, or any other changes to the responsibilities assigned to members of 

MSD. 
24

 The Exchange should ensure that MSD maintains staffing sufficient to perform 

all of its surveillance responsibilities, including timely completion of surveillance 

investigations. 

VI. MARKET SURVEILLANCE PROCEDURES AND SYSTEMS

A. Market Surveillance Procedures Manual

Pursuant to the Exchange’s Procedures Manual, MSD performs the following significant 

responsibilities on a routine basis, in addition to other specific duties discussed in more detail 

below:

 Monitor large trader positions through the Exchange’s computerized large trader 

reporting system, in order to detect potential position limit violations, positions in 

excess of position accountability levels, potential reporting deficiencies, and 

deviations from MPs’ normal trading activity.

 Monitor daily trading in Exchange contracts using MSD’s trading surveillance 

application (SMARTS), to identify deviations from participants’ normal trading 

activity.

 On a daily basis, monitor Exchange-generated reports that compare large trader 

data to open interest, for purposes of identifying reporting discrepancies and 

ensuring the accuracy of large trader data.

 On a daily basis, analyze price and volume data to detect (e.g.) unusual price 

movements, market congestion, or unusual volume activity, which could be 

indicative of underlying problems in the market. 

 Contact trade sources and large traders on a regular basis to monitor deliverable

supplies of physical-delivery commodities, as well as delivery intentions when a 

contract is approaching or is in a notice period, in order to ensure an orderly 

liquidation.

 Intensify surveillance during contract expirations, in order to detect and prevent 

price manipulation and facilitate orderly liquidations. MSD focuses on large 

trader positions and position concentrations, and the relationship between open 

interest and deliverable supplies.
25

 Determine appropriate responses to potential rule violations, including position 

limit violations, reporting violations, and failure to provide 102 forms.27 

Responses may include an information letter or warning letter, further 

investigation, or referral to the Compliance Department or to the Clearinghouse 

for summary action.

B. Large Trader Reporting System

MSD’s principal tool for monitoring positions held by large traders is the Market 

Surveillance Application (“MSA”), the Exchange’s computerized large trader reporting system.28 

MSD reviews large trader positions through the MSA in order to detect potential position limit 

violations, positions in excess of position accountability levels, potential reporting deficiencies, 

and deviations from MPs’ normal trading activity.

29

 The MSA maintains large trader data on 

futures and options positions received from clearing members and other reporting firms. All 

clearing members are required to transmit reportable futures and options position data daily to 

the Exchange.30 Once an MP reaches the reportable level in one contract, then the MP must 

report all of its positions in that particular commodity to the Exchange. Non-member FCMs and 

foreign brokers are also required to provide daily large trader reports (including reportable 

futures and options positions) to the Exchange. The MSA also maintains historical large trader 

information.

MSD uses the database information available in the MSA to generate a variety of reports, 

including a report organized by reporting firm that lists all unidentified accounts. When an 

unidentified account holds a large position, MSD contacts the relevant firm by telephone and 

 

27 See the Commission website for more information regarding 102 forms at 

http://www.cftc.gov/ucm/groups/public/@forms/documents/file/cftcform102.pdf

28 The Exchange transitioned to the MSA system in January 2007.

29 See Section IX below for additional information on position limits and accountability levels.

30 Exchange Rule 6.15(a) requires that “Members which own, control, or carry for any Customer a 

reportable position, as such term is defined by the Act and the Regulations thereunder, shall submit daily 

reports with respect to such positions to the Exchange containing such information as may be prescribed 

by the CFTC.” See § 15.00(p) of the Commission’s regulations for definition of “reportable position.” 
26

requires the firm to submit a 102 form, in order to expedite the identification process. MSD

gives clearing members, non-clearing FCMs, and foreign brokers five business days to submit

the 102 form. MSD makes requests for 102 forms on a weekly basis, or more frequently as 

needed. 

The MSA stores account identification data, data on delivery notices that MPs have 

issued and stopped, and Against Actuals (“AA”)/EFP transactions for MPs with reportable 

positions. MSD uses the MSA application to aggregate related and/or commonly controlled 

accounts, based on information obtained from 102 forms and MSD discussions with reportable 

MPs. MSD may view positions within the application by account, MP, commodity, or on an 

aggregate basis. 

C. Electronic Tools for Monitoring Trading

1. SMARTS. The Market Surveillance Department complements the MSA with 

SMARTS, a third-party trade surveillance application. The SMARTS application provides MSD

with the capability to monitor and review trading in a graphical format. SMARTS also allows

MSD to view details of trades, as well as details of executed and unexecuted orders, on a realtime basis. MSD may view trading activity in a specified market for an entire day, or for a 

specified time period or point in time during the day. MSD conducts intensive monitoring using 

SMARTS during contract expirations and delivery periods. 

MSD uses four specific tools available through SMARTS:

(1) The ‘spread’ tool generates a graphical view of trading in a particular market; 

(2) The ‘broker overview’ tool allows MSD to monitor the order book activity 

(including filled, unfilled and canceled orders) of a specific MP;

(3) The ‘replay’ tool recreates the order book and market depth at any point in time; 

and 

(4) The ‘ALMAS’ tool generates automated, real-time market alerts (e.g., alerts 

regarding a particular MP, or volume in a particular account). 

MSD uses SMARTS to generate two alerts specifically for market surveillance purposes:

a Price Spike Alert and Participant Volume Spike Alert. The Price Spike Alert is designed to 

identify potential improper trading activity by an MP that may represent an attempt to 
27

manipulate price or direction of the market. The Participant Volume Spike Alert is designed to 

detect aberrant or unusual trading by an MP that may be indicative of improper trading activity. 

Each of the four SMARTS tools described above allows the user to view trading activity 

in real time in a particular market at the market level or MP level. Because SMARTS also 

maintains historical information, it allows MSD to use the above-described tools to reconstruct 

the order book and trading, or replay trading activity in a market for trade dates prior to the 

current day. 

2. WebICE. In addition to SMARTS, the Exchange uses its internal webICE 

application on a daily basis to monitor trading activity. WebICE displays real-time price and 

volume data. MSD uses webICE to generate an overview of trading activity, and uses SMARTS 

to review trading activity on a more granular basis and to identify specific MPs holding 

positions. 

D. Crystal Reports; ICE Report Center

1. Crystal Reports. MSD generates a number of reports through the 

Exchange’s “Crystal” application for purposes of monitoring market fundamentals. The Crystal 

application creates reports using data stored in the Exchange’s database. None of the Crystal 

reports are automated; instead, they must be run manually by MSD. MSD may download 

information from the Crystal reports into an Excel spreadsheet so that the data may be further 

sorted. Several of the Crystal reports that are most fundamental to MSD’s market surveillance 

activities are discussed below. 

a. Firm Positions vs. Open Interest (OI) Spreadsheet. The Firm Positions 

vs. Open Interest (OI) Spreadsheet (the “Firm Positions Spreadsheet”) compares a clearing 

member’s large trader data to its open interest to identify reporting discrepancies. MSD 

addresses such reporting discrepancies by contacting clearing members and other reporting firms 

to determine the reason(s) for the discrepancies so that large trader and open interest data is 

reported accurately. Open interest data is made available in several different reports in the 

Report Center on the ICE website (discussed below).

31

 Prior to the introduction of the Firm 

 

31 See, e.g., the ICE Futures U.S. Daily Volume and OI Summary for Futures, at 

https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/37.
28

Positions Spreadsheet, MSD reviewed the Positions vs. OI Futures Spreadsheet to compare a 

clearing member’s large trader data to its open interest. The Firm Positions Spreadsheet offers a 

more detailed view than the Positions vs. OI Futures Spreadsheet because the Firm Positions 

Spreadsheet breaks large trader positions into two categories: trader and omnibus accounts. 

Large trader data that appears in the Firm Positions Spreadsheet is provided by clearing firms 

and other reporting firms, while open interest data is provided by the Clearinghouse. When 

generating the Firm Positions Spreadsheet, MSD sets a variety of parameters: date, futures 

and/or options, commodity or all, firm ID (the code for a clearing member) or all, percentage 

difference, and minimum OI. MSD monitors the Firm Positions Spreadsheet closely near 

contract expiration in order to ensure the accuracy of open interest and large trader reporting, but 

monitors the Spreadsheet less frequently at other times. 

b. OI vs. Position Alert Report and EFP and Notices Report. On a daily 

basis, MSD reviews the OI vs. Position Alert Report, a Crystal report that identifies significant 

discrepancies between reported large trader positions and open interest. The OI vs. Position 

Alert Report was introduced in September 2013, following the end of the target period. In its 

review of MSD’s surveillance capabilities, the Division was concerned about MSD’s ability 

during the target period to monitor for open interest on a consistent basis throughout the contract 

lifecycle. The Division believes that the introduction of the OI vs. Position Alert Report 

following the end of the target period, and the daily review of this report by MSD, should 

address this concern. The report allows MSD to identify discrepancies that equal or exceed a 

percentage (set by the user) for contracts with an amount of open interest that equals or exceeds a 

certain quantity (also set by the user). MSD also generates the EFP and Notices Crystal report to 

review reports of large traders’ EFRPs and deliveries. This data assists MSD in reviewing 

market activity of large traders and in monitoring contract expirations. This report assists MSD 

to anticipate MPs’ behavior in the current expiration. For example, MSD analyzes the historical 

behavior of MPs in the market to determine how frequently they made or took delivery in past 

expirations. This information promotes an orderly liquidation, by improving MSD’s ability to 

forecast whether MPs are capable of making or taking delivery. 

c. Top Day Alert Report, Over Limits Alert Report and Trader Positions 

Over Time Spreadsheet. On a daily basis, MSD also reviews large trader positions for 
29

compliance with speculative position limits and/or position limits granted by exemptions.32 MPs

that are near or above their position limits are identified in two Crystal reports: the Top Day 

Alert Report and the Over Limits Alert Report. The Top Day Alert Report displays alerts for the 

most recent trading day. The report shows the name and position of any entity that has a position 

in excess of a specific position quantity or percentage of a speculative position limit that has 

been established by MSD. The Over Limits Alert Report provides a more granular view of 

information presented in summary fashion in the Top Day Alert Report. The Over Limits Alert 

Report shows both the gross and net positions of any entity that has a position exceeding a 

specified limit, and allows users to view positions on both an aggregate and disaggregated basis, 

broken up by MP. On an as-needed basis, MSD reviews the Trader Positions Over Time 

Spreadsheet, a Crystal report that provides historical large trader position information over a date 

range selected by the user. MSD uses this spreadsheet most often during the period leading up to 

the date when a spot month position limit takes effect. MSD uses the spreadsheet to monitor 

changes in positions as those dates approach. 

2. ICE Report Center. The Exchange makes a variety of reports available 

via the Report Center on the ICE website, which is a publicly available website.

33

 These reports, 

which are generated from Exchange and Clearinghouse data, include a Daily Volume and Open 

Interest report, Historical Monthly Volume report, End of Day report, Delivery Notice report, 

and Daily Settlements report, among others. The Report Center allows users to generate reports 

for specific markets and date ranges. MSD reviews these reports on a regular basis in connection 

with its market surveillance activities. 

E. Data Regarding Deliverable Warehouse Receipts

On an as-needed basis, MSD asks the Exchange’s Commodity Operations Department 

whether certain MPs hold deliverable warehouse receipts. This information is not available to 

MSD through an automated system. Deliverable warehouse receipts give MPs the right to draw 

 

32 See Section IX below for a discussion of monitoring procedures for position limits and accountability 

levels. 

33 https://www.theice.com/marketdata/reports/ReportCenter.shtml
30

down exchange-grade products from a warehouse. By determining whether MPs hold 

deliverable warehouse receipts, MSD is better able to determine whether these MPs can make 

delivery in the current expiration. 

F. Conclusions Regarding Reporting Systems and Other Automated Tools

The Division believes that the Exchange has appropriate tools for monitoring daily 

trading activity and positions held by large traders, in addition to other daily market surveillance 

tasks. The Division therefore has no recommendations in this area. At the same time, the

Division believes that the Exchange should continue to evaluate whether its reporting systems 

and other tools (including, for example, the MSA, SMARTS, Crystal reports, and the reports 

available on the ICE Report Center) can be further improved to function in more automated and

efficient ways. For example, the Exchange should consider whether to eliminate the need for

manually downloading information into Excel spreadsheets prior to its routine use by MSD. The 

Exchange should also consider whether to incorporate additional functionality or new search 

criteria, improve the processing time required for systems to generate reports, or add new reports 

to enable MSD to evaluate market surveillance data more efficiently and effectively. 

VII. ROUTINE SURVEILLANCE OF MARKET FUNDAMENTALS

A. Monitoring For Open Interest

As mentioned above, MSD reviews the Firm Positions Spreadsheet frequently, and the OI 

vs Positions Alert Spreadsheet daily, to monitor for open interest and large trader reporting 

discrepancies. MSD generates the Firm Positions Spreadsheet daily for contracts during notice 

period to determine where non-reportable positions are cleared. When reviewing the reports, 

MSD looks for situations where reported open interest is significantly larger or smaller than large 

trader positions, indicating possible errors in large trader reporting or open interest reporting. 

Mistakes in open interest reporting may occur when positions are closed out in omnibus 

accounts, but the carrying firm does not inform their clearing firms that those positions are 

closed out. In this scenario, the omnibus positions continue to be erroneously reported in open 

interest. Open interest reporting errors can also occur when large EFPs are cleared into a 

customer account but should be cleared into a firm’s house account, and when futures positions 
31

that result from option expirations are not correctly applied to existing futures positions.

Instances of misreporting of open interest during the target period are discussed below and in 

Section X(B). 

On a daily basis, MSD also reviews open interest reporting on the End of Day Reports 

(such as the Daily Market Report), via the Report Center on the ICE website. If a report shows a 

change in open interest that is larger than trade volume (or trade volume plus notices during 

notice period), MSD will generally conduct further investigation, since this would indicate a 

possible misreporting of open positions by one or more MPs.

The Division has identified a number of issues related to the misreporting of open 

interest. While the Clearinghouse Rulebook does have rules stating that open interest must be 

reported correctly, there is no Exchange rule that sets forth procedures regarding open interest

reporting. As a result, the Exchange does not have specific protocols in place that establish when

it will address misreporting of open interest in addition to or in lieu of the Clearinghouse. For 

example, the Exchange has not established written rules or procedures clarifying whether the 

Exchange or Clearinghouse is responsible for conducting investigations, preparing and issuing 

fines, and bringing disciplinary cases for misreports of open interest. During the target period, 

both the Exchange and Clearinghouse brought sanctions for instances of misreporting of open 

interest, raising questions about which entity is responsible for investigating and sanctioning 

such misreporting. (During the target period, the Clearinghouse issued five fines of $500 each 

for open interest misreporting, and one fine for $1,000. The Division questions whether fines of 

$500 are sufficient to deter recidivism by member firms.) Furthermore, while the Exchange 

maintains copies of Clearinghouse assessment letters addressing instances of misreporting, the 

Exchange does not always assign a case number when investigating instances of misreporting, 

and does not track on a log investigations that do not receive a case number. The Exchange did 

assign case numbers to two instances of misreporting of open interest during the target period, as 

discussed below and in Section X(B). 

In case # 2012-033, a firm misreported open interest when it reported a large amount of 

open interest, but a much smaller number of large trader positions. (The same firm had also 

misreported open interest during another recent expiration.) Case # 2012-033 was resolved after 

the Exchange issued a warning letter to the firm, and the Clearinghouse issued an assessment 

letter, involving a $1,000 fine, for the same misreporting event. 
32

Case # 2012-002 involved open interest misreporting by a firm on December 13, 2011. 

The Exchange opened an investigation on January 3, 2012. A 21 day lapse therefore occurred in 

this instance between the misreported open interest and investigatory action being taken by the 

Exchange. Case # 2012-002 was ultimately resolved in April 2013, when the firm paid a fine of 

$20,000 pursuant to a settlement agreement with the Exchange. 

The Division makes the following recommendations to ensure that the Exchange

implements clear and systematic rules or procedures and appropriate sanctions regarding the 

misreporting of open interest:

 If the Exchange intends to continue to sanction misreporting of open interest 

alongside the Clearinghouse, then the Exchange’s rulebook should set forth specific 

rules stating that open interest misreporting represents a violation of Exchange 

rules. Any Exchange sanctions for the misreporting of open interest should be 

sufficient to deter recidivism. 

 The role of Exchange staff in enforcing Clearinghouse requirements regarding open 

interest reporting should be formalized in the procedures manual of the Exchange. 

If the Exchange intends to continue sanctioning misreporting of open interest, it 

should maintain records of any sanctions also issued by the Clearinghouse so that it 

may properly account for recidivist behavior.

B. Monitoring For Prices and Volume

MSD uses a number of resources to analyze price and volume data in order to detect, for 

example, unusual price movements, potential price distortions or manipulation, market 

congestion, or unusual volume activity, which could be indicative of underlying problems in the 

market. MSD also analyzes such data to ensure that information provided in various reports in 

the Report Center on the ICE website is accurate. 

1. Price Data. For purposes of acquiring market news, cash price changes, 

and other price relationships relevant for market surveillance purposes, MSD analysts scan

various independent market news websites and commodity-oriented websites, such as 

Agrimoney. MSD does not, however, have access to any private wire services. MSD also 

reviews SMARTS and the Exchange’s webICE application on a daily basis for real-time trade 
33

data, including price quotes. Finally, MSD speaks to MPs on a regular basis to obtain 

information about prices in both the futures markets and related cash markets.

2. Volume Data. MSD also reviews SMARTS and the webICE application 

on a daily basis for volume information. In addition, MSD analyzes volume data received from 

the Clearinghouse. Volume data is made available in several different reports in the Report 

Center on the ICE website.34 

The Division believes that private newswire services can enable analysts to perform more 

effective market surveillance. Such services can be used to identify problems developing in the 

marketplace, find new sources of information, identify MPs’ strategies and activities in the 

market, and locate historical data on prices and volume, in addition to other uses relevant to 

market surveillance. The Exchange’s Procedures Manual states that analysts should “use the 

internet, wire services and Exchange data” to monitor prices, trading and volume daily in 

Exchange contracts. MSD analysts do not, however, have access to private wire services. 

Accordingly, the Division suggests that the Exchange enhance its market surveillance 

program by providing private commodity-oriented newswire services to its analysts, either on 

their desktops, or in a stand-alone device near their work areas. Examples of available services 

include FutureSource, Reuters, or Bloomberg. 

C. Monitoring Deliverable Supply for Physically Delivered Commodities

MSD monitors deliverable supply to avoid situations in which there is insufficient supply 

of a commodity at expiration, which can make the commodity contract susceptible to price 

manipulation or distortion. In connection with this monitoring process, MSD routinely contacts

MPs to inquire about deliverable supply in relation to upcoming contract expirations. MSD also 

consults warehouse stock reports to monitor for deliverable supply. MSD reviews warehouse 

stock reports daily during the period leading up to notice periods and during notice periods, and 

frequently at other times. MSD also consults with the Commodity Operations Department staff 

to obtain additional information about warehouse stocks, such as the identification of owners of 

such stocks. 

 

34 See, e.g., the ICE Futures U.S. Daily Volume and OI Summary for Futures, at 

https://www.theice.com/marketdata/reports/ReportCenter.shtml#report/37.
34

In addition to the warehouse stock reports, MSD monitors market news daily for 

information that could impact deliverable supplies, such as weather disturbances or strikes at 

origin or delivery points. To analyze supply and demand data and other relevant market 

information, MSD reviews USDA reports, such as World Markets and Trade for all soft and 

agricultural commodities, World Agricultural Production for cotton and grains, and the Weekly 

Cotton Market Review. MSD reviews reports from domestic and foreign agencies and 

institutions, such as the Florida Agricultural Statistics for orange juice, the Brazilian government 

agency Conab for Brazilian sugar production, and the Australian government agency ABARES

for cotton statistics. Finally, MSD reviews reports by FCM analysts and foreign brokers, such as 

Softs: Fast Facts for soft commodities, which is available on the public Exchange website.

35

When monitoring deliverable supply, MSD conducts further investigation in a variety of 

circumstances, such as: (a) if the warehouse stock reports indicated low stocks or large 

drawdowns of stocks; (b) if the reports indicated small or no quantities put up for grading, or 

unusually large quantities put up for grading; or (c) if MSD detected a concentration of 

ownership, particularly if an entity requested a long exemption from position limits, but already 

owned a significant portion of existing certified stocks. 

The Division believes that the Exchange has adequate procedures for monitoring 

deliverable supply of physical-delivery contracts and its adequacy to satisfy the delivery 

requirements. Accordingly, the Division has no recommendations in this area.

VIII. SURVEILLANCE OF EXPIRING CONTRACTS

A. Standard Procedures for Intensified Surveillance

MSD conducts intensified surveillance of expiring contracts in order to detect and 

prevent price manipulation and facilitate orderly liquidations. Intensified surveillance typically 

begins approximately two weeks prior to a spot month and continues throughout this period. 

MSD focuses on large trader positions and position concentrations, and the relationship between 

deliverable supply and open interest. For example, MSD conducts daily review of the trading 

 

35 See https://www.theice.com/publicdocs/futures_us/ICE_Monthly_Softs_Fast_Facts.pdf
35

and positions of large traders, in light of current open interest and the size and ownership of 

deliverable supply for physical delivery contracts. MSD also monitors cash market prices, 

unusual short supply indications, abnormal price relationships among cash, futures, and options 

markets, and other unusual market circumstances that could potentially result in liquidation 

problems. MSD relies principally on the SMARTS system to conduct intensified surveillance of 

expiring contracts. MSD also reviews charts comparing open interest over the prior three years 

to determine if open interest is large or small in the current expiration as compared to historical 

trends.

Two weeks before the notice period and spot month position limits take effect, MSD

sends reminder letters to MPs whose current positions would violate those limits, and who might 

be eligible for an exemption. Applicants must submit exemption requests at least five business 

days before the date on which applicants are requesting that the exemptions become effective.

36

MSD also schedules Control Committee meetings on an as-needed basis for the week 

before notice period or spot month position limits take effect.37 If warranted by market 

conditions, additional Control Committee meetings may be scheduled during the notice period or 

last trading month. 

The Division has determined that the Exchange has an adequate standard procedure for 

intensified surveillance of expiring contracts to detect and prevent price manipulations and 

facilitate orderly liquidations. Accordingly, the Division has no recommendations regarding this 

procedure.

B. Monitoring for Price Convergence

As part of its standard procedures for intensified surveillance, MSD also monitors for 

price convergence. Price convergence refers to the process whereby the price of a physically 

delivered futures contract converges to the spot price of the underlying commodity, as the futures 

contract nears expiration. The effectiveness of a physically delivered contract as a hedging 

instrument is determined, in part, by the extent to which the futures price reliably converges to 

 

36 See Section IX below for a detailed discussion of MSD’s procedures for monitoring of position limits 

and accountability levels.

37 See Section V(B) above for a discussion of the structure and role of Control Committees. 
36

the comparable cash market price, or to a predictable differential to the comparable cash market 

price.38 Commission regulation 38.252(a), the compliance date of which occurred following the 

end of the target period, requires that, for physical-delivery contracts, a DCM must demonstrate 

that it “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.”

39

 

MSD asserts that it has limited ability to monitor for price convergence in the 

international soft products (i.e., Coffee, Sugar and Cocoa). According to MSD, it is inherently 

more difficult to statistically determine convergence of futures to cash market prices for 

international soft products. MSD cited the example of the ICE Futures U.S. Sugar No. 11 

contract; the cash price of sugar of deliverable quality can be different in different geographic 

locations, and there is no available resource that reflects the cash price at each/any of these 

locations at a given point in time. As a result of this characteristic of international soft 

commodities, MSD noted that convergence does not carry the same connotation as it might in the 

case of domestic agricultural commodities for which daily prices are published by government 

agencies and other public sources. MSD also noted that it regularly receives input from the 

members of the Exchange’s Coffee, Sugar and Cocoa product advisory committees. In addition, 

MSD stated that it contacts trade sources and large traders on a regular basis to collect 

information regarding physical market developments and discuss price movements and physical 

supplies. Finally, MSD noted that it works closely with Control Committees in monitoring the 

expiration of futures contracts, particularly when a situation is identified that could result in a 

disorderly liquidation, including price distortions or market disruptions. 

The Division is continuing to review the Exchange’s procedures with regard to 

monitoring for price convergence in the international soft products to determine if they are 

 

38 See 75 FR 80572, Dec. 22, 2010 at 80583 for a discussion of the price convergence process. 

39 The compliance date of Commission regulation 38.252(a) was October 17, 2012, following the end of 

the target period. 
37

consistent with Commission regulation 38.252(a).

40

 As a result, the Division is not making any 

determinations in this rule enforcement review with respect to the Exchange’s procedures for 

monitoring for price convergence in the internationals softs products.

C. Expirations During the Target Period Requiring Intensified Surveillance

The Exchange has developed written criteria to determine whether a contract expiration is 

or could become problematic. For example, for physical delivery contracts, the Exchange 

considers several factors, including whether any of the following have occurred: (1) there are 

tight supplies for the delivery period; (2) dominant positions are held by a single MP on either 

the long or short side; (3) long positions are held by MPs that want to take delivery that exceed 

available deliverable supplies; (4) large short positions are held by entities without the capacity 

to make delivery; (5) and/or short positions are held that exceed the likely demand for delivery.

The Exchange identified one contract expiration that required particular scrutiny during 

the target period: the July 2011 Cotton futures contract, which was subject to tight supplies. In 

addition, an entity with a large short position did not appear to have the capacity to deliver. In 

examining this expiration, the Division found that this expiration file contained adequate 

documentation, including notes regarding MSD’s discussion with the relevant Control 

Committee, and notes regarding a June 2011 discussion with Commission staff with respect to 

this expiration. The contract expiration culminated in an orderly fashion. 

The Division has determined that the Exchange has adequate procedures for identifying 

and analyzing contract expirations that are or could become problematic in order to facilitate 

orderly liquidations. For the one expiration requiring intensified scrutiny during the target 

period, MSD responded appropriately to the expiration-specific market factors, ensured 

orderliness, and kept well-documented files. Accordingly, the Division has no recommendations 

regarding this procedure. 

 

40 In the event that the Division determines that the Exchange’s procedures with regard to monitoring for 

price convergence in the international soft products may be inconsistent with Commission regulation 

38.252(a), the Division will contact the Exchange to address this issue. 
38

IX. POSITION LIMITS AND ACCOUNTABILITY LEVELS 

A. Monitoring of Position Limits and Accountability Levels

1. Overview. The size of Exchange MPs’ positions is subject to two types of 

monitoring and control: position limits and position accountability levels. The Exchange sets 

position limits and accountability levels for all Exchange-traded products, subject to Commission

approval, with two exceptions: the position limits for Cotton No. 2 and cash-settled grain 

contracts, which are stipulated by Commission regulations. 

Position limits are set by the Exchange when a product is first launched and may be 

adjusted periodically. Exemptions may be granted for single month and net overall month limits, 

and the notice period and spot month period for the Sugar No. 11 contract. Position limits bar an 

MP from holding or controlling a net futures equivalent position that exceeds the position limit 

for the contract in question. The particular position limit may be adjusted in individual instances 

by a hedge, arbitrage or straddle exemption granted to the participant by the Exchange, as 

discussed below. Exceeding a position limit without having previously obtained an exemption is 

a rule violation, unless the MP exceeded the limit due to unforeseen bona fide hedging needs, 

and files for an exemption within a specified period after the position is assumed.

Position accountability levels are also set by the Exchange when a product is first 

launched, and are based on MSD assessment of available data, such as deliverable supply 

information and projected open interest. Accountability levels can be adjusted periodically, and 

adjustments thereto constitute rule filings that are subject to approval by the Commission or the 

Commission’s self-certification procedures.41 Position accountability rules enable the Exchange 

to instruct an MP not to increase its position any further and/or to reduce its position to the 

appropriate accountability level. The Exchange may invoke this authority due to liquidity 

concerns, or for any other reason that the Exchange believes may negatively impact the market. 

Position accountability levels apply to single month and net all month positions in Cocoa, 

Coffee, Sugar No. 11 and certain currencies. 

 

41 CEA § 5c(c); 17 C.F.R. §§ 40.5, 40.6.
39

2. Monitoring of Position Limits. On a daily basis, MSD reviews large 

trader positions for compliance with speculative position limits. MPs that are near or above their 

position limits are identified in the Top Day Alert Report and the Over Limits Alert Report. 

MSD may set alerts in the Top Day Alert Report at a specific contract level, or at a percentage of 

the position limit. Position limit alerts are typically set at 80 percent of the applicable limit (or 

80 percent of a limit as modified by a position limit exemption). 

The Over Limits Alert Report provides a more granular view of information presented in 

summary fashion in the Top Day Alert Report. MSD views each report daily. MSD also uses 

the Commodity screen in MSA to monitor for compliance with position limits. This screen 

allows MSD to view all positions in a commodity for a specific contract month or in all months 

combined, sorted by size of position. MSD can choose to view only positions in excess of a 

certain quantity through the MSA in order to focus on large positions.

MSD may telephone, e-mail, or fax an advisory letter to identified MPs notifying them 

that they are approaching their position limit, asking about their trading strategy and intentions, 

and reminding them that they may need to apply for an exemption or an expansion of a current 

exemption, if appropriate. 

If an MP exceeds a position limit, then MSD attempts to contact the MP by telephone or 

e-mail. If the MP has exceeded the limit due to unforeseen bona fide hedging needs, then the 

MP is permitted to file an exemption request. MPs are allowed five business days to file an 

exemption request for Coffee, Sugar and Cocoa, and 10 business days for all other contracts. If 

MSD approves the exemption, then no violation is deemed to have occurred. 

3. Monitoring of Position Accountability Levels. Similar to the monitoring 

process for position limits, on a daily basis, MSD reviews position accountability levels via the 

Top Day Alert Report and the Over Limits Alert Report. Because MSD intentionally sets 

accountability levels low, it is not unusual for certain MPs to hold positions in excess of the 

levels. MSD also uses the Commodity screen in MSA to monitor position accountability levels. 

When an MP initially exceeds a position accountability level, MSD attempts to contact 

the MP directly. If MSD is unable to reach the MP, it will contact the reporting firm carrying the

position. MSD will request information regarding the nature of the position (e.g., hedging, 

speculative, arbitrage), trading strategy, how large the MP anticipates the position may become, 

and any other information that MSD considers relevant. Such additional information may 
40

include any systems and policies that the MP has implemented for monitoring when spot month 

position limits take effect, and any internal guidelines the MP may have established regarding 

the percentage of open interest the MP may hold. MSD maintains notes regarding these 

discussions. 

When instructing an MP pursuant to position accountability rules, MSD will make a 

determination whether to set a limit on position size, order a position reduction, or take other 

appropriate action. During the target period, MSD set a limit on MPs’ position size on three 

occasions, requested information about the nature of MPs’ positions on three occasions, and 

instructed one MP to stop increasing its position. MSD did not order any position reductions 

during the target period. When setting a limit on position size, MSD takes a number of factors 

into consideration. For a commercial MP, the position limit is based on the MP’s bona fide 

hedging and/or arbitrage needs. For a non-commercial MP, the factors considered include the 

MP’s trading strategy and the history of the MP’s activities in Exchange markets. If an MP who 

exceeds a position accountability level fails to follow instructions issued by the Exchange, MSD

regards this action as a position limit violation, and takes appropriate action.

The Division has determined that the Exchange has an adequate procedure for setting and 

monitoring for position limits and accountability levels. Accordingly, the Division has no 

recommendations in this area.

B. Exemptions from Position Limits

1. Standard Procedures for Exemption Applications. During the target 

period, the Exchange received 142 exemption applications. One-hundred twenty-one of the 

exemption applications related to bona fide hedging requests, while 21 related to arbitrage or 

cash and carry requests. The Exchange granted 92 new exemptions during the target period. 

a. Single and Net Overall Month Exemptions. To apply for a single month 

and/or net overall month position limit exemption, an MP must file an exemption request form 

with the Exchange. Among other questions, the form asks for the following information:

 What position limits are needed for this firm’s hedging, straddle/arbitrage and swap 

requirements? 
41

 For bona fide hedging requests, provide specific information which will demonstrate 

that the proposed transactions are bona fide hedging transactions. In particular, 

describe the size and nature of the cash transactions and/or physical positions to be 

hedged. 

 For notice period or spot month exemptions, indicate whether the cash market 

transactions described in the form will take place during the delivery period for which 

the hedge exemption is required.

 For straddle/arbitrage hedging requests, provide specific information that will 

demonstrate that the proposed transactions are arbitrage or straddle positions as 

defined in Exchange Rules. 

In addition, the form requires the applicant to agree to a number of representations, 

including the following:

 That the intended transactions are bona fide hedge transactions and/or 

straddle/arbitrage transactions.

 That the applicant will comply with whatever limitations are imposed by the 

Exchange with regard to said positions.

 That the applicant will submit a supplemental statement explaining any material 

change in circumstances affecting the position.

 That the applicant will comply with all other Exchange Rules and requirements.

The form must be signed by an Exchange member or an officer or partner of an Exchange 

member firm.

When reviewing an exemption request, MSD considers the size of the requested position 

with respect to open interest, the principal business and occupation of the requestor, the 

requestor’s historical level of futures and options positions, the requestor’s assets and obligations 

in the physical market, and any other information that MSD considers relevant to the request. 

For hedge exemption requests, MSD relies in part on Commission regulation 1.3(z), discussed in 

more detail below. MSD considers exemption requests for futures positions related to swaps to 

be hedge exemption requests. 

Within five days of the submission of a completed request, MSD informs the applicant in 

writing whether the exemption has been granted, partially granted, or denied. MSD records 

summary information regarding exemption requests. MSD enters approved exemption quantities 
42

for single month and net overall month exemptions into the MSA, along with the date the 

exemption was granted. MSD also maintains paper files of all documentation related to 

exemptions requested and granted.

All single month and net overall month exemptions are reviewed annually by MSD to 

ensure that outstanding exemption levels still reflect the nature and scope of the exemption 

holder’s business. On an annual basis, an MSD analyst sends a letter to either the MP (if a 

member) or to the clearing firm asking whether the exemption on file is still appropriate and still 

reflects the party’s bona fide hedging needs. If nothing has changed, the party is only required to 

sign and return the letter. If something has changed, the party must submit a new application. If 

the party does not respond to the letter, MSD cancels the exemption. MSD enters the date the 

exemption was granted or updated into the MSA. 

The Division is concerned that some MPs could simply sign and return the letter for a 

period of several years before they would be asked to submit new data supporting their existing 

level of exemption. This is of note because of the Division’s concern about the sufficiency of the 

original application, as discussed further below. Accordingly, the Division makes the following 

recommendation to ensure that hedge exemptions granted to MPs are based upon their current 

hedging needs, and are supported by sufficient documentation.

 The Exchange should require market participants to resubmit detailed information 

on at least an annual basis to support their single month and all month hedge 

exemptions. 

b. Notice Period, Spot Month and Cash and Carry Exemptions. Notice 

period and spot month exemptions are specific to a particular contract. Such exemptions expire 

on the last notice day for the contract for which the exemption was granted. To apply for a 

notice period or spot month position limit exemption, an MP must file a request form with the 

Exchange. When reviewing notice period and spot month exemption requests, MSD considers 

the size of the requested position with respect to open interest, the principal business and 

occupation of the requestor, the requestor’s historical level of futures and options positions, the 

requestor’s assets and obligations in the physical market, and any other information that MSD

considers relevant to the request. MSD places particular emphasis on current cash and futures 
43

commitments, delivery intentions and deliverable supplies. The applicant must justify the entire 

position requested, not just the amount in excess of the speculative position limit. 

For cash and carry exemption requests (discussed in more detail below), the applicant 

must provide its cost of carry and the minimum spread at which the MP will enter into a straddle 

position and which would result in an economic profit for the MP. The applicant must also 

provide the quantity of stocks in Exchange-licensed warehouses that it already owns. The 

applicant’s entire long position carried into the notice period must have been put on as a spread 

at a differential that covers the applicant’s cost of carry. 

c. Provisional Exemptions. A member whose position is approaching or 

exceeds current limits may request an exemption or an expansion of current limits by 

telephoning MSD and orally providing the information needed to process the request. If the 

exemption is granted, the applicant must file a completed exemption request form with MSD 

within 24 hours.

Exchange Rule 6.26 states that, “The position limits for Exchange Futures and Options 

Contracts specified in [Chapter 6 of the Exchange Rulebook] shall not apply to bona fide 

hedging positions as defined in Section 1.3(z)(1) of the Regulations under the Act.” Commission 

regulation 1.3(z)(1) defines bona fide hedging transactions and positions. The definition 

provides several examples of bona fide hedging transactions and positions, including sales that 

do not exceed the ownership or fixed-price purchase of the same cash commodity by the same 

person and, similarly, purchases that do not exceed the fixed-price sale of the same cash 

commodity by the same person.42

 

42 Commission regulation 1.3(z)(2)(i) states that the definitions of bona fide hedging transactions and 

positions include “sales of any commodity for future delivery on a contract market which do not exceed 

in quantity: (A) Ownership or fixed-price purchase of the same cash commodity by the same person.” 

Commission regulation 1.3(z)(2)(ii) states that the definitions of bona fide hedging transactions and 

positions include “purchases of any commodity for future delivery on a contract market which do not 

exceed in quantity: (A) The fixed-price sale of the same cash commodity by the same person.” Note that 

on November 18, 2011, the Commission adopted part 151 to establish a position limits regime for twentyeight exempt and agricultural commodity futures and options contracts and the physical commodity 

swaps that are economically equivalent to such contracts (the “Position Limits Final Rule”). See 76 FR 

71626 (Nov. 18, 2011). As part of the Position Limits Final Rule, the Commission also adopted changes 

to Commission regulation 1.3(z). The Position Limits Final Rule was vacated by the United States 

District Court for the District of Columbia on September 28, 2012, with the result that the pre-existing 

version of Commission regulation 1.3(z), cited above in this footnote, remains in effect. 
44

Exchange Rule 6.26 requires that MPs submitting a request for a hedge exemption 

demonstrate that the proposed transactions are bona fide hedging transactions (as defined in 

regulation 1.3(z)). Notwithstanding this Exchange Rule, the Exchange permits MPs in Sugar to 

support a request for a hedge exemption with unfixed-price purchases and sales. Such positions

do not qualify as bona fide hedging positions under Commission regulation 1.3(z). When 

Division staff called this inconsistency to the attention of Exchange representatives, they agreed 

to propose an amendment to the Exchange Rulebook stating that the Exchange will offer hedge 

exemptions from the position limits for Exchange Futures and Options Contracts for bona fide 

hedging positions as defined in Section 1.3(z)(1) of the Regulations under the Act (which 

currently appears in the Rulebook), and also for other non-enumerated hedging positions that are 

otherwise determined by the Exchange to be consistent with the purpose of hedging (which 

would be a new addition to the Rulebook). As of the date of this report, the Exchange had 

committed to make this change to its Rulebook, but had not yet finalized the implementation of 

the change. 

2. Cash and Carry Exemptions. Exchange Rule 6.27 permits Exchange 

members to apply for a cash and carry exemption in connection with arbitrage, spread and 

straddle strategies. This type of exemption is unique to the Exchange, and is not offered by other 

DCMs. Rule 6.27 states in relevant part:

(b) To be eligible for an exemption under this Rule, a Member must submit to the 

Exchange a written request in the form provided by the Exchange which shall 

include the following:

...

(vii) when applying for a cash and carry exemption, the trader must provide the 

cost of carrying the physical commodity, the minimum spread differential at 

which the trader will enter into a straddle position in order to obtain profit, and the 

quantity of stocks the trader currently owns in Exchange licensed warehouses or 

tank facilities.

...

(e) When granted a cash and carry exemption, the trader shall agree that, (i) 

before the price of the nearby contract month rises to a premium to the second 
45

(2nd) contract month, the trader will liquidate all long positions in the nearby 

contract, and (ii) the trader will comply with all other restrictions or limitations 

placed on the trader as a condition to the grant of the exemption.

A cash and carry exemption allows an MP to take delivery in the near month and 

redeliver the same product in a deferred month at a profit. In carrying-charge markets, current 

deliverable stocks are usually adequate and prices are higher for deferred expiration months. 

MPs may request cash and carry exemptions when the spread between the expiring contract and 

next delivery month exceeds carrying charges. Thus, an MP who has purchased the near month 

and sold the deferred month may profit by taking delivery and redelivering the next month.

The Exchange approved 21 cash and carry exemptions during the target period. In June 

2013, following discussions between the Division and the Exchange regarding cash and carry 

exemptions, the Exchange reviewed the procedure by which such exemptions are granted. The 

Exchange opined to the Division that “cash and carry exemptions [are] beneficial for the market, 

particularly when there are plentiful warehouse stocks, which typically is the only time when the 

opportunity exists to utilize the exemption.” The Exchange also opined that “the current 

Exchange rules and procedures [are] effective in ensuring orderly liquidations.”

The Division is continuing to review the effectiveness of the Exchange’s cash and carry 

exemptions and the procedure by which the Exchange grants such exemptions.

43 As a result, the 

Division is not making any determinations with respect to the cash and carry exemption in 

connection with this rule enforcement review. 

 

43 In the event that the Division determines that the Exchange’s cash and carry exemptions and the 

procedure by which the Exchange grants such exemptions may not be effective, the Division will contact 

the Exchange to address this issue. 
46

3. The Division’s Review of Particular Exemption Files. As discussed in 

Section IX(B)(1) above, when completing an exemption request form, the applicant must 

complete several detailed questions, which request information on the size of position requested 

and, if for bona fide hedging, specific information that demonstrates that the proposed 

transactions are intended for hedging purposes, including the size and nature of the cash 

transactions/positions to be hedged. Additionally, exemption applications require information

concerning the MP’s relationship to other MPs/accounts, and various representations concerning 

the obligations placed on the MP when granted an exemption. Applicants requesting a Cotton 

exemption must also file a copy of the latest Form 304 report that they filed with the 

Commission. 

During the target period, the Exchange received 142 exemption applications. Onehundred twenty-one of the exemption applications related to bona fide hedging requests, while 

21 related to arbitrage or cash and carry requests. The Exchange granted 92 new exemptions 

during the target period. The Division reviewed 25 representative exemption applications of the 

142 applications that were received by the Exchange. The Division concluded that applicants 

sometimes do not fill out the form completely, i.e., some questions are not answered, and the 

answers to some questions are not complete. Some examples are illustrated below:

 One MP stated in its exemption application that it “has net unfilled physical delivery 

obligations of [a stated amount] of nearby commitments and we will potentially look to 

satisfy via Exchange delivered product...”

 Another MP stated the following in its exemption application: “Current inventory = [x]

million [in a stated commodity], Purchases = [x] million [commodity], Committed sales 

= [x] million [commodity], Ending inventory (deficit) = [x] million [commodity] or [x]

contracts.”

44

The requested exemptions were granted to both MPs. In these two examples, the MPs

did not indicate whether the “unfilled... obligations” or “committed sales” referenced in the 

applications are fixed-price sales contracts, as required by the application form. Furthermore, if 

the first MP’s unfilled nearby commitments represent processing requirements, any hedges 

granted are restricted during the last five trading days of contract expiration. The documents 

 

44 The Division has redacted the exemption applications discussed in this section in order to preserve the 

confidentiality of the market information presented and the identity of the applicants.
47

provided by the Exchange contained other hedging exemption requests that were not fully 

completed. 

The Division believes applicants did not provide enough information in these responses 

for the Exchange to adequately assess the merits of the hedging exemptions requested. MPs

omitted certain critical information, including specific numbers for their inventories and sales 

commitments, the time period of MPs’ sales commitments, and whether the sales were fixed or 

unfixed price. The Exchange did not provide documentation indicating whether the missing data 

was elicited from the MP by other means (for example, in telephone conversations). The 

Division makes the following recommendation to increase the amount and accuracy of 

information provided on exemption applications, and to ensure that the Exchange receives 

sufficient information to analyze whether an exemption sought is appropriate:

 Prior to granting a hedge exemption, the Exchange must ensure that applicants 

complete each question in their exemption applications. The Exchange must also 

ensure that applicants provide sufficiently detailed information to allow the 

Exchange to analyze the underlying reasons for the request, and whether those 

reasons are consistent with the requirements for the exemption sought. 

X. REVIEW OF MARKET SURVEILLANCE INVESTIGATIONS

A. General Procedures

MSD conducts investigations of potential violations of Exchange Rules and other 

applicable regulations, such as position limit violations and misreporting of open interest. When 

MSD completes an investigation, MSD prepares an investigation report recommending 

appropriate action—e.g., that MSD refer the matter to an Exchange disciplinary panel, or issue a 

staff warning letter or fine. MSD considers an investigation closed on one of two different dates, 

depending on how the investigation is ultimately resolved. If the investigation is not referred to 

a disciplinary panel, the close date is considered to be the date that is recorded on the MSD 

investigation report. If the investigation is referred to a disciplinary panel, the close date is 

considered to be the date the investigation is initially presented to the Business Conduct 

Committee. MSD attempts to complete investigations in less than one year. MSD does not have 
48

a manual setting forth the procedures to be followed in conducting investigations. Investigations 

are completed and documented in largely the same manner by both the Market Surveillance 

Department and the Compliance Department, which does rely on a procedures manual to conduct 

investigations. Documentation related to MSD investigations is maintained in paper format. 

B. Review of Investigations During Target Period

1. Overview. The Division reviewed 10 MSD investigations in connection 

with this rule enforcement review. These 10 investigations represent all of the investigations that 

were open during any portion of the target period. Three of the 10 were opened before the 

beginning of the target period, with the remaining seven opened during the target period. Six of 

the 10 investigations were closed during the target period, with three closed after the end of the 

target period. In addition, one investigation opened during the target period was suspended by 

the Exchange upon being separately investigated by the Commission’s DOE.45 Nine of the 10 

investigations have therefore been closed.

Five of the closed investigations were resolved by MSD through the issuance of a 

warning letter. Four of the closed investigations were resolved pursuant to settlement 

agreements, involving fines of $20,000 (case # 2012-002), $25,000 (case # 2011-070), $50,000

(case # 2010-071) and $100,000 (case # 2011-056). The respondent in case # 2012-002, also 

discussed in Section VII(A) above, inaccurately reported open interest. The respondent in case # 

2011-070 violated Exchange position limit rules by maintaining a short position in Cotton No. 2 

for a corporate affiliate that exceeded the net futures equivalent all months position limit. 

Similarly, the respondent in case # 2010-071 violated Exchange position limit rules by 

maintaining a short position in Cotton for a corporate affiliate that exceeded the net futures 

equivalent single month position limit. The respondent in case # 2011-056 failed to comply with 

the restrictions of a cash and carry exemption granted by the Exchange. 

Four of the 10 investigations related to position limit violations; one investigation related 

to failure to comply with the restrictions of a cash and carry exemption granted by the Exchange; 

one investigation related to large trader reporting deficiencies; two investigations related to open 

 

45 The Exchange suspended its investigation, but kept the investigation open, based on instructions 

provided by DOE.
49

interest reporting deficiencies; one investigation related to a rule violation in connection with 

several Exchange of Options for Options transactions; and one investigation was suspended by 

the Exchange upon being separately investigated by the Commission’s DOE. The Division 

believes that the analysis performed by MSD in the course of the 10 investigations was generally 

thorough and well-reasoned. The Division notes that case numbers were not assigned to two 

investigations during the target period, and formal investigation reports were not prepared by 

MSD in connection with these investigations. The Exchange has informed the Division that in 

May 2012, MSD procedures were changed to require that case numbers be assigned and an 

investigation report be prepared for matters that appear to involve an Exchange rule violation, 

regardless of whether the matters are resolved without findings of rule violation or result in 

summary action, such as an MSD warning letter or summary fine. During its next rule 

enforcement review of the Exchange, the Division will evaluate MSD’s compliance with this 

May 2012 policy. The Division also notes that two investigation reports from the first half of 

2012 were not dated by MSD staff. The Division recommended in a rule enforcement review of 

the Exchange’s disciplinary program, dated December 14, 2012, that the Exchange should record 

the date in investigation reports on which the reports are approved by senior Compliance staff. 

The Division understands that the Exchange implemented this recommendation in both its 

Compliance and Market Surveillance departments following the December 2012 rule 

enforcement review. The Division will evaluate the Exchange’s compliance with this 

recommendation during its next rule enforcement review of the Exchange. Subject to the

foregoing, the Division believes that the 10 investigations reviewed were sufficiently 

documented. Furthermore, the Division believes that the sanctions imposed by the Exchange via 

warning letters and monetary fines appear generally reasonable relative to the violations alleged 

and evidence presented. 

2. Timeliness of Proceedings. The average length of time between the opening and 

closing of the nine investigations closed during the target period was 288 days.46 With respect to 

the nine closed investigations, the shortest and longest time between the date an investigation 

 

46 MSD considers an investigation closed on one of two different dates, depending on how the 

investigation is ultimately resolved. If the investigation is not referred to a disciplinary panel, the close 

date is considered to be the date that is recorded on the MSD investigation report. If the investigation is 

referred to a disciplinary panel, the close date is considered to be the date the investigation is initially 

presented to the Business Conduct Committee.
50

was opened and the date it was completed was 14 days and 652 days, respectively. Four of the 

nine closed investigations took over one year to complete: 424 days, 450 days, 501 days and 652 

days. The Division is particularly concerned with the timing of two of these investigations. One 

investigation took 501 days to complete with no apparent mitigating circumstances justifying the 

prolonged open period. The investigation involved a position limits violation that occurred in 

November 2010. The Exchange closed the investigation in March 2012 by issuing a warning 

letter. Another investigation, involving failure to comply with a cash and carry exemption, took 

652 days to complete. The Exchange closed the investigation in July 2013 via a settlement 

agreement that provided for a $100,000 fine. Although the Division acknowledges that this 

investigation involved extended negotiations, the Division believes that the Exchange should 

have resolved the investigation more expeditiously than 652 days. 

As noted above, the Exchange informed the Division that the Market Surveillance 

Manager left the Exchange following the end of the target period. The Exchange also stated that, 

in an effort to reduce the time required to resolve surveillance investigations, the Exchange 

assigned the duties of the Market Surveillance Manager to the MSD Senior Analyst.

47

 In light of 

the four investigations open for substantially more than a year (including one investigation with 

no apparent mitigating circumstances, along with another investigation open for 652 days), as 

well as the reduction in staffing and personnel change within MSD, the Division encourages the 

Exchange to maintain sufficient staffing within MSD to promptly fulfill all of its surveillance 

and investigatory responsibilities.48

 

47 As noted above in Section V(C), the Senior Analyst has 13 years of commodities industry experience 

and is being trained in all aspects of market surveillance.

48 See also the Division’s recommendation with regard to staffing in Section V(C) above: “The Exchange 

should ensure that MSD maintains staffing sufficient to perform all of its surveillance responsibilities, 

including timely completion of surveillance investigations.”