RULE ENFORCEMENT REVIEW

OF THE

MINNEAPOLIS GRAIN EXCHANGE

Division of Market Oversight

August 27, 2009
Table of Contents

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

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS ................................................. 5

A. Compliance Staff ............................................................................................................... 5

B. Market Surveillance ........................................................................................................... 5

C. Audit Trail.......................................................................................................................... 6

D. Trade Practice Surveillance ............................................................................................... 7

E. Disciplinary Program ......................................................................................................... 8

F. Dispute Resolution Program............................................................................................... 9

III. OVERVIEW OF MGEX PRODUCTS AND SIGNIFICANT CHANGES AT THE

EXCHANGE SINCE THE LAST RULE ENFORCEMENT REVIEW........................................ 9

A. Volume Surge and Price Volatility ................................................................................... 9

B. Shift to Electronic Trading. ............................................................................................ 11

IV. COMPLIANCE STAFF...............................................................................12

A. A&I.................................................. ......................................................... 12

B. Conclusions and Recommendations ............................................................................. 14 

V. MARKET SURVEILLANCE................................................................................................. 15

A. Daily Surveillance Activities........................................................................................... 16

1. Volume And Open Interest........................................................................................ 16

2. Price Changes And Intermarket Relationships.......................................................... 18

3. Deliverable Supplies.................................................................................................. 19

4. Heightened Surveillance Of Expiring Contracts....................................................... 20

B. Large Trader Reporting And Speculative Limit Enforcement......................................... 24

C. Monitoring Of Futures For Physicals And Exchange Of Futures For Risk Transactions 26

D. Conclusions and Recommendations................................................................................ 28

VI. AUDIT TRAIL PROGRAM ................................................................................................. 29

A. Audit Trail for Electronic Trading................................................................................... 30

 B. Enforcement of Electronic Audit Trail and Recordkeeping Requirements ..................... 33

C. Audit Trail for Open Outcry Trading............................................................................... 36

 1. Open Outcry Orders...........................................................................36 

 2. Trade Timing for Open Outcry Trades......................................................37 

 D. Floor Order Tickets and Trading Cards........................................................................... 39

 E. Safe Storage Capability........................................................................... 41

F. Conclusions and Recommendations................................................................................. 42

VII. TRADE PRACTICE SURVEILLANCE PROGRAM ........................................................ 43

A. Automated Surveillance System...................................................................................... 44

B. Floor Surveillance ............................................................................................................ 45

C. Trade Practice Investigations........................................................................................... 46
2

1. Initiation of Inquiries and Investigations.................................................... 46

2. Adequacy of Investigations................................................................... 47

D. Conclusions and Recommendations................................................................................ 50

VIII. DISCIPLINARY PROGRAM ............................................................................................ 51

A. Disciplinary Committees and Procedures........................................................................ 51

B. Reminder and Warning Letters........................................................................................ 53

C. Adequacy of Sanctions Imposed...................................................................................... 53

D. Timeliness of Disciplinary Proceedings .......................................................................... 56

E. Conclusions and Recommendations................................................................................. 56

IX. DISPUTE RESOLUTION PROGRAM................................................................................ 58

A. Arbitration Procedures..................................................................................................... 58

B. Conclusions and Recommendations ................................................................................ 59
3

Rule Enforcement Review of the

Minneapolis Grain Exchange

I. INTRODUCTION

The Division of Market Oversight (―Division‖) has completed a rule enforcement review 

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

resolution programs of the Minneapolis Grain Exchange (―MGEX‖ or ―Exchange‖) for 

compliance with related core principles under Section 5(d) of the Commodity Exchange Act 

(―Act‖), as amended by the Commodity Futures Modernization Act of 2000 (―CFMA‖), and Part 

38 of the Commission’s regulations.1 The review covers the period of October 1, 2006 to June 

30, 2008 (―target period‖).2

The review focused on Core Principle 2, Compliance with Rules and Core Principle 12, 

Protection of Market participants, that relates to surveillance, enforcement, and disciplinary 

procedures used by a contract market to protect market participants from abusive trading 

practices; Core Principle 4, Monitoring of Trading, that relates to an exchange’s program to 

prevent manipulation, price distortion, and disruption of the delivery or cash settlement process; 

Core Principle 5, Position Limitations or Accountability, that relates to an exchange’s program 

 

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

compliance capabilities for the period under review. Such reviews deal only with programs directly addressed in the 

review and do not assess all programs 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.

2 The original target period for the Exchange was October 1, 2006 to September 30, 2007. It was expanded through 

June 30, 2008, to accommodate the review of the Exchange’s audit trail program for electronic orders as a result of 

the Exchange’s announcement on October 24, 2008, to close its trading floor effective December 19, 2008, and 

transitioning exclusively to electronic trading for all futures trading. (Open outcry trading for options contracts 

continues to trade in a room located at the Exchange’s headquarters that is separate from the trading floor that 

closed). The expanded review also allowed the Division to review a larger number of trade practice investigations 

and disciplinary cases. 
4

for enforcing its speculative position limits and position accountability rules; Core Principle 10, 

Trade Information and Core Principle 17, Recordkeeping, that relate to an exchange’s audit trail 

program for recording and safe storage of trade information in a manner which enables 

prevention of customer and market abuses and enforcement of exchange rules; Core Principle 13, 

Dispute Resolution, that relates to fair and equitable dispute resolution procedures for customers 

and member-to-member disputes. Appendix B to Part 38 provides acceptable practices for 

demonstrating compliance with these core principles.3

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

from the Exchange’s Department of Audits and Investigations (―A&I‖). The Division also 

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

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

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

and market and trade practice surveillance;

• audit trail review and trade practice and market surveillance investigation files;

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

• disciplinary case files;

• minutes of disciplinary committee, Board of Directors (―Board‖) meetings held during 

the target period; and

• compliance procedures manuals and guidelines.

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

 

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

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

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

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

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

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

Principle 12 at a later date.
5

this report on July 20, 2009. On August 4, 2009, Division staff conducted an exit

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

II. SUMMARY OF FINDINGS AND RECOMMENDATIONS

A. Compliance Staff

Findings

 The Exchange’s compliance department, (―A&I‖), consists of four staff members: the 

Director of Market Regulation, two staff investigators, and a part-time administrative 

assistant. These staff members are responsible for carrying out all of the Exchange’s 

self-regulatory obligations, including market surveillance, floor surveillance, trade 

practice surveillance, and financial surveillance.

 A&I experienced high turnover with the departure of four staff investigators during and 

immediately after the close of the target period.

 The high staff turnover contributed to the delay in completing two investigations in a 

timely manner and conducting prompt interviews in one trade practice investigation. 

 Although the Director of Market Regulation has extensive compliance experience, the 

high turnover of staff investigators in conjunction with a prolonged surge in trading 

volume and unprecedented price volatility during the target period, placed a significant 

strain on A&I’s ability to perform its multiple daily surveillance activities and fulfill the 

Exchange’s self-regulatory responsibilities. 

Recommendations

 MGEX should increase the A&I staffing level to ensure that, among other things, 

the Exchange can efficiently and effectively perform routine surveillance activities,

keep pace with volatile trading periods, and complete investigations in a timely 

manner, including conducting prompt interviews after a potential trading violation 

has been detected. 

 MGEX should examine the underlying reasons for the large number of staff 

departures over the target period. This examination should include an analysis of 

the Exchange’s budget to ensure that, among other things, competitive 

compensation and benefits are being offered to retain qualified investigators.

B. Market Surveillance

Findings
6

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

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

ensure orderly liquidation of expiring contracts. 

 The Exchange monitors cash and futures prices, spread and basis relationships, size and 

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

interest and deliverable supply. Exchange staff also monitors the bona fide exchange of 

futures for physicals and exchange of futures for risk transactions.

 The Exchange heightens surveillance of expiring contracts by monitoring potential 

position concentrations, deliverable supplies, and the relationship between open interest 

and deliverable supplies. 

 The Exchange reviews several large trader reports to analyze large trader activity to 

monitor positions approaching spot month or all-month speculative limits and to detect 

potential concentration of positions that could disrupt the market. During the target 

period, one account exceeded the all-months limit in the hard red spring wheat futures 

contract for a three-day period. The account holder self-reported the violation to the 

Exchange and the Commission, and reduced the positions immediately to comply with

the speculative limit. 

 During the target period, the Exchange opened two investigations to address concerns 

regarding possible manipulation, including a possible squeeze in the expiring May 2007 

hard red spring wheat futures contract. A&I determined there was no evidence to support 

the claims. The Division found that the investigations were well-documented and 

included appropriate, well-founded analysis to support their findings.

The Division has no recommendations in this area.

C. Audit Trail

Findings

 The Exchange maintains an adequate audit trail program for open outcry trading. The 

Exchange conducts an annual audit trail review of each clearing member to evaluate 

compliance with relevant recordkeeping and submission requirements. Members and 

clearing firms demonstrated a high rate of compliance with Exchange recordkeeping 

requirements during the audit trail reviews. The Division found that the audit trail 

reviews were thorough and well-documented.

 The Exchange requires that members manually record the time of each open outcry trade 

to the nearest minute. The Exchange uses a computerized verification program to 

monitor and enforce compliance with the trade timing requirements. The Exchange 

examines the underlying trade documents as well as time and sales data for members 

whose timing deficiency level exceeds the daily or monthly timing error thresholds. The 
7

limited number of timing error investigations can be attributed to a high rate of 

compliance by MGEX members.

 For electronic trading on CME Globex® (―Globex‖), the Exchange’s electronic trading 

platform, the Exchange maintains a complete electronic record of all orders entered and 

transactions executed, including the terms and time of entry for each order, all order 

modifications, and all matched trades. This record enables MGEX to reconstruct 

electronic trading efficiently and effectively. However, the Exchange’s audit trail 

compliance program does not include a programmatic review of the electronic audit and 

recordkeeping rules that is comparable in rigor and scope to its review for open outcry 

trading. 

 MGEX has adequate procedures for safe storage of audit trail data. Data is backed-up 

daily and stored at an off-site back-up storage location. Audit trail data for both 

electronic and open outcry trades is also simultaneously replicated to the Exchange’s

remote data center. 

Recommendations

 The Exchange augment its audit trail compliance program for electronic trading to 

include a programmatic review of electronic audit and recordkeeping rules that is 

comparable in rigor and scope to its review program for open outcry trades. 

D. Trade Practice Surveillance

Findings

 The Exchange maintains an adequate trade practice surveillance program. The Time 

Audit Report and the Broker Error Type Report serve as the Exchange’s automated trade 

practice surveillance system to identify possible trading practice violations in open outcry 

and electronic trading. 

 A&I conducts daily floor surveillance of open outcry trading during the opening and 

closing of all contracts and at randomly selected times throughout the trading session.

 MGEX closed 15 investigations during the target period. All of the investigations were 

well-documented and supported by appropriate analyses. However, two of the 

investigations were not completed in a timely manner. In addition, in one investigation, 

the Division found that interviews with potential witnesses were not conducted promptly 

after the potential trading violation was identified. The Division found that the delays 

could be attributed to staff turnover, a shift in A&I resources to address two complaints in 

the wheat market, and heightened surveillance of the wheat market as a result of 

unprecedented volatility.

Recommendations
8

 Take appropriate measures, including hiring additional staff, to ensure that 

interviews are conducted promptly after a potential trading violation is identified 

and that investigations are conducted in a timely manner.

E. Disciplinary Program

Findings

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

(―FTCC‖) and the Business Conduct Committee (―BCC‖). The FTCC has jurisdiction 

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

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

as registration issues, clearinghouse matters, position limits and margins. 

 The BCC considered six disciplinary cases and the FTCC considered one disciplinary 

case during the target period. The Exchange issued fines totaling $12,750. All seven

cases were concluded with settlements. One case involved a member reporting bids that 

were not bona fide, resulting in a $10,000 fine and a ten-day suspension. 

 Fines ranging from $250 to $750 were imposed in six recordkeeping cases. Five of the 

recordkeeping cases involved firms filing inaccurate position reports with the 

clearinghouse and/or offsetting positions without the benefit of trade activity, resulting in 

two $250 fines and three $500 fines. One recordkeeping case involved reporting and 

recordkeeping deficiencies by a member firm, resulting in a $750 fine. The Division 

believes larger fines should have been imposed in all six cases. 

 Two of the six recordkeeping cases involved repeat offenders. In one case, a clearing

member that received a $500 fine for violating the Exchange’s offset rules also received 

three separate fines for the same rule violation during the previous six-year period. 

When evaluating an appropriate sanction, the BCC only considered the member’s prior 

history for the previous two-year period. In the second case, a clearing member that 

received a $250 fine for failing to submit an accurate position report to the clearinghouse 

received a $250 fine in 2005 for the identical rule violation. 

 A total of 62 staff reminder letters and 16 staff warning letters were issued during the 

target period. These letters included one reminder letter and three warning letters to the 

same clearing member during an 11-month period for failing to submit accurate position 

reports to the clearinghouse. 

 Recommendations

 The Exchange’s disciplinary committees should ensure that all sanctions imposed in 

connection with disciplinary matters are of sufficient magnitude to serve as an 

effective deterrent.

 
9

 The Exchange’s disciplinary committees should review a member’s complete 

disciplinary history when determining appropriate sanctions and impose 

meaningful sanctions on members who repeatedly violate the same or similar 

Exchange rules to discourage recidivist activity. 

 Absent extenuating circumstances, no more than one reminder letter and one 

warning letter should be issued in a rolling 12-month period before sanctions are 

imposed. 

F. Dispute Resolution Program

Findings

 Exchange rules provide customers with voluntary procedures for arbitration that are 

fundamentally fair and equitable. Each party has the right to counsel and each party 

receives adequate notice of claims presented against them and an opportunity to be heard 

on all claims, defenses, and counterclaims. MGEX’s arbitration procedures require a 

prompt hearing and authorize prompt, written, final settlement awards that are not subject 

to appeal within the Exchange. 

 There were no matters submitted for arbitration during the target period.

Recommendations

 Because there were no requests for arbitration filed during the target period, the 

Division has no basis upon which to evaluate the adequacy of the Exchange’s 

dispute resolution program.

III. OVERVIEW OF SIGNIFICANT CHANGES AT THE EXCHANGE SINCE THE 

DIVISION’S LAST RULE ENFORCEMENT REVIEW

Since the Division’s last MGEX rule enforcement review in 2004 (and during the 18-

month target period), MGEX experienced two significant events: (1) a prolonged surge in 

trading volume and unprecedented price volatility and (2) a growth in electronic trading that led 

to the December 19, 2008 closing of its trading floor for all futures trading. These events 

materially impacted the Exchange’s self-regulatory program and are discussed in detail below.

A. Volume Surge and Price Volatility

MGEX’s total trading volume from December 1, 2002 to December 1, 2003 (the target 

period for the 2004 Review) was 1,128,253 contracts, an average of approximately 94,021 
10

contracts traded per month. In comparison, from October 1, 2006 to June 30, 2008, the target 

period for this review, MGEX’s total volume was 2,963,752 contracts, an average of 141,131 

contracts per month. The Exchange’s flagship hard red spring wheat contract accounted for 

more than 99 percent of the Exchange’s trading volume, with 2,963,608 contracts traded for both 

futures and options.4 

The significant volume surge at MGEX resulted in numerous Exchange trading records 

during and immediately after the close of the target period. For example, the trading volume 

from September 2007 to August 2008, the Exchange’s fiscal year, resulted in the all-time volume 

record for the Exchange with 1,684,439 contracts traded. During this same timeframe, six alltime monthly record trading volumes were set.

5

 Additionally, the all-time monthly record for 

options volume was set in February 2008 with 14,554 contracts traded. The Exchange’s all-time 

open interest record was also set on October 8, 2007 with 76,805 contracts.6 

In addition to a significant volume surge during the target period, the Exchange’s hard 

red spring wheat futures contract experienced unprecedented price volatility. For example, the 

December 2007 contract began trading on April 7, 2006, and settled at $4.38. In comparison, on 

December 14, 2007, the December contract closed at $11.30, (158 percent increase from the 

April 7 settlement price). Additionally, the hard red spring wheat futures contract settled at the 

 

4

In addition to the hard red spring wheat contract, the Exchange offers electronic trading for five agricultural index 

futures and options contracts: National Corn Index (―NCI‖), National Soybean Index (―NSI‖), Hard Red Spring 

Wheat Index (―HRSI‖), Hard Red Winter Wheat Index (―HRWI‖), and Soft Red Winter Wheat Index (―SRWI‖). 

5 The monthly trading volume records included September, October, and November of 2007 as well as January, 

February, and August of 2008.

6 After the close of the target period, the Exchange experienced a decline in trading volume. For example, during 

the first five months of 2009, the average number of contracts traded per month was 88,472 (37 percent decline from 

the target period).
11

limit a total of 71 times and limit moves occurred in the daily trading range a total of 122 times

from October 2007 to March 2008.

7

 

The Division recognizes that the surge in trading volume and price volatility that 

occurred during the target period may have been atypical. However, an exchange must have 

appropriate resources to effectively perform its self-regulatory functions during volatile periods, 

as well as during any other unusual circumstances. As demonstrated by the numerous records set 

during the target period, market volatility can last for prolonged periods. Accordingly, for this 

review, the Division assessed the Exchange’s ability to perform its self-regulatory 

responsibilities under unusual market conditions.

B. Shift to Electronic Trading 

The Exchange’s total electronic trading volume during the target period was 830,215 

contracts, which accounted for approximately 28 percent of the overall volume. During the 

period from September 2007 to August 2008, electronic trading volume more than doubled from 

the previous 12-month period. Every month in the September 2007 to August 2008 timeframe 

placed in the top 20 electronic trading volume months at the Exchange. 

On August 1, 2006, MGEX launched side-by-side trading of its hard red spring wheat 

contract.8 On January 13, 2008, electronic trading at MGEX shifted from CBOT’s electronic 

platform, e-cbot, to CME’s electronic platform, Globex. As noted above, on October 24, 2008, 

MGEX announced it was closing its trading floor for futures contracts effective December 19, 

 

7

In response to the volatility, MGEX, the Kansas City Board of Trade (―KCBT‖), and the Chicago Board of Trade 

(―CBOT‖) announced an expansion of the price limit for all of the exchanges’ respective wheat contracts on 

February 8, 2008, from 30 cents per bushel to 60 cents per bushel above or below the previous day’s settlement 

price. The price limit expands to 90 cents per bushel on the next trading day if the 60-cent limit is reached.

8

Previously, the contract only traded electronically during the overnight trading session.
12

2008, and transitioning all futures trading to Globex.

9

 Given that MGEX did not have any 

electronic trading during the Division’s previous rule enforcement reviews, the Division is

assessing for the first time the sufficiency of the Exchange’s audit trail and trade practice 

surveillance programs as they relate to electronic trading.

IV. COMPLIANCE STAFF

A. A&I

Currently, A&I is headed by the Director of Market Regulation, who reports directly to 

the President and Chief Executive Officer of the Exchange. The Director was initially employed 

by MGEX as a staff investigator from 1991 through 1994. During the 1994 to 2005 time period, 

the Director was employed outside the Exchange by several financial firms. In January 2006, the 

Director assumed her current position.

The Director is primarily responsible for the oversight and management of MGEX’s 

market surveillance, trade practice surveillance, financial surveillance, audit trail, and 

disciplinary enforcement programs. These responsibilities include determining whether an 

investigation should be initiated and the scope of the investigation. Additionally, the Director is 

responsible for the training and development of A&I staff.

The remainder of A&I staff consists of two staff investigators and a part-time 

administrative assistant that report to the Director. Staff investigators are responsible for 

conducting market surveillance, floor surveillance, trade practice surveillance and financial 

surveillance, and participating in training and development in all aspects of the Exchange’s 

surveillance programs.

During the period from December 2006 to October 2008, the Exchange experienced high 

turnover with respect to its staff investigators. Over this 23-month period, four staff 

 

9 All options open outcry trading continue to trade in a room at the Exchange’s headquarters.
13

investigators left the Exchange. A total of seven investigators have left the Exchange since 

2002. The first staff investigator position was held by an employee that left in September 2007 

after spending three years at the Exchange. The Exchange filled this vacancy by hiring an 

employee from the Exchange’s Trading Operations Department. However, this investigator 

resigned from the Exchange in August 2008 after one year in the position. Although the 

Exchange moved quickly to fill the position by hiring another investigator in September 2008, 

that investigator departed the Exchange after only three weeks. The current investigator began 

working for MGEX as a trading floor operations employee in September 2008, and joined A&I 

as a staff investigator in November 2008. The second staff investigator position was held by an 

employee that left in December 2006 after spending 17 months at the Exchange. This position is 

currently occupied by an investigator who has been employed by A&I for more than two years. 

Prior to her appointment to A&I, this investigator had extensive experience in the futures 

industry, including seven years of employment at the compliance department of a commodities 

firm. 

The Division believes that the multiple daily surveillance activities that must be 

performed by A&I staff to meet its self-regulatory responsibilities placed significant strain on 

A&I during the prolonged volatile market that occurred during the target period. Additionally, 

as discussed below, the high turnover of staff investigators contributed to delays in completing 

two trade practice investigations, and in conducting prompt interviews in one of these 

investigations.10 The timeliness of both investigations were impacted by the need for A&I to 

shift its limited resources to conduct heightened surveillance of the wheat market during a period 

 

10 Investigations 06-I-33 and 07-I-01 are discussed in detail in Section (VII)(C)(2) on pages 47-49 of this report.
14

of unprecedented volatility11 and to address two complaints concerning the liquidation of the 

May 2007 hard red spring wheat futures contract.12

B. Conclusions and Recommendations

The Director of A&I, who has been with the Exchange in this position since January 

2006, has significant industry experience. She is assisted in performing her substantive 

responsibilities by two investigators. Over a 23-month period during and immediately after the 

close of the target period, four investigators left the Exchange. In addition, the volatile market 

conditions that occurred during the target period strained A&I’s ability to perform its 

surveillance responsibilities. Specifically, the Division found that staff turnover coupled with the 

demands placed on A&I by unusual market conditions contributed to delays in completing two 

trade practice investigations and in conducting timely interviews for one investigation.

Lengthy delays in completing investigations have a deleterious effect on the overall 

effectiveness on an exchange’s rule enforcement program because, among other things, prompt 

investigation and disciplinary action are necessary to discourage further violations of exchange 

rules. Therefore, the Division believes that hiring additional staff investigators and reducing 

staff turnover would enhance the overall effectiveness and efficiency of the Exchange’s 

compliance department, and allow it to meet the demands that can result from unexpected or 

unusual market conditions. Based on the foregoing, the Division recommends that the 

Exchange:

 Increase the A&I staffing level to ensure that, among other things, the Exchange can 

efficiently and effectively perform routine surveillance activities, keep pace with 

 

11 As is discussed in Section (V)(A)(2) on pages 18-19 of this report, A&I intensified surveillance of the wheat 

market from October 2007 through March 2008. 

12 The two complaints concerning the liquidation of the May 2007 hard red spring wheat futures contract are 

discussed in greater detail in Section (V)(A)(4) on pages 20–24 of this report.
15

volatile trading periods, and complete investigations in a timely manner, including 

conducting prompt interviews after a potential trading violation has been detected. 

 Examine the underlying reasons for the large number of staff departures over the 

target period. This examination should include an analysis of the Exchange’s 

budget to ensure that, among other things, competitive compensation and benefits 

are being offered to retain qualified investigators.

V. MARKET SURVEILLANCE

Core Principle 4 – Monitoring of Trading:

The board of trade shall monitor trading to prevent manipulation, price distortion, 

and disruptions of the delivery or cash-settlement process. 

Core Principle 5 – Position Limitations or Accountability: 

To reduce the potential threat of market manipulation or congestion, especially 

during trading in the delivery month, the board of trade shall adopt position 

limitations or position accountability for speculators, where necessary and 

appropriate. 

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

Commission’s regulations, an acceptable market surveillance program should provide for the 

regular collection and evaluation of market data to determine whether markets are responding to 

the forces of supply and demand. An exchange also should have routine access to the positions 

and trading of its market participants. To diminish potential problems that may arise from 

excessively large speculative positions, an exchange may need to establish speculative limits for 

some commodities. Rules establishing such limits may provide for hedge or other exemptions, 

and the limits may be set differently for each contract, delivery month, or period when in effect. 

Spot month limits should be adopted for markets based on commodities having limited 

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

price distortion. 

Position limits may not be necessary for markets where the threat of manipulation is very 

low. For such contracts, such as financial instruments, an exchange may provide for position 
16

accountability in lieu of position limits. An exchange should have an automated large trader 

reporting system that is used daily to enforce compliance with position limit rules.

A. Daily Surveillance Activities

The market surveillance program to monitor futures and options contracts trading on the 

Exchange primarily involves the daily recording and analyzing of statistical data combined with 

floor surveillance. As part of its daily surveillance activities, A&I manually records all 

surveillance data on the Daily Market Surveillance Log (―DMSL‖) to monitor trading activity. 

The information on the DMSL is obtained from computer-generated reports and is used by A&I 

to identify possible price manipulation or price distortion and to increase the surveillance of 

expiring contracts. The daily surveillance focuses on the monitoring of cash and futures prices, 

spread and basis relationships, size and ownership of deliverable supply, and size of large trader 

positions relative to total open interest and deliverable supply.

1. Volume and Open Interest

A&I reviews several computer-generated reports to analyze potential market congestion. 

The Open Share Of Market-Regular Report and the Open Share Of Market-Segregated Report 

are reviewed by A&I staff to detect potential problems of concentration of positions with any 

one clearing member. These reports enable A&I staff to monitor gross positions for both house

and customer accounts at each of the Exchange’s clearing members. On a daily basis, A&I posts 

the three largest long and short positions in the nearby month for each MGEX contract. This 

information is reviewed and recorded on the DMSL along with the percentage of open interest 

held by each clearing member.
17

A&I staff review all open contracts on a daily basis for any significant changes in open 

interest held by each member. Staff also consider external factors that may impact the market, 

such as economic news, embargoes, weather, and domestic and foreign markets crises. When 

significant changes in daily open interest are detected, staff conducts further analysis to 

determine the underlying causes for the change and the effect on the market.13 During the target 

period, A&I detected that material decreases in open interest occurred during the contract month 

liquidation and delivery period for eight contract months.14 For each of the contract months, 

A&I conducted a review of the trading activity, including a review of the long and short 

positions during the delivery process, monitored the deliveries, and held discussions with the 

clearing member firms to determine the intent of the position holders in relation to the delivery 

process. A&I determined the long position holders were liquidating their positions or were 

willing and able to take delivery while the short position holders were also liquidating their 

positions or held cash positions and intended to make delivery. A&I also determined the short 

position holders were sufficiently capitalized to meet MGEX margin requirements. A&I 

concluded the changes in open interest were primarily the result of routine trading activity. 

Consequently, no investigations were initiated as a result of the material decreases in open 

interest during the target period.

A&I’s daily market surveillance activities also include reviewing the Volume and Open 

Interest By Clearing Member Report and Volume and Open Interest By Commodity Report. 

These reports detail all trades, transfers, deliveries and delivery intentions, cash exchanges for 

futures, and ending long and short positions on a gross basis for customer and house accounts for 

 

13 An increase or decrease of 30 percent or more in the total open interest in any contract month, or a large switch 

from long to short or short to long, is considered to be a significant change. A&I did not detect any material 

changes in positions from long to short or short to long during the target period.

14 December 2006, March 2007, May 2007, July 2007, September 2007, December 2007, March 2008, and May 

2008.
18

each clearing member in each contract month. The information contained in these reports allows 

A&I to monitor changes in a clearing member’s open position by analyzing the components of 

such changes. 

2. Price Changes and Intermarket Relationships

A&I records daily price ranges and settlement prices by contract month for the 

Minneapolis, Chicago, and Kansas City wheat markets. Settlement prices are also recorded by 

contract month for the electronically traded indexes. A&I calculates and records the change in 

settlement prices for each commodity future daily and compares the current settlement price with 

the previous day’s settlement price. A&I also calculates the spread differential by comparing the 

current day’s settlement in deferred months to the spot month settlement for each commodity. 

Similar monitoring of spreads for MGEX’s indexes are conducted by comparing the NCI, NSI, 

HRSI, HRWI, and SRWI daily price ranges and settlement prices for those contracts with daily 

price ranges and settlement prices for CBOT corn and soybean futures, and the MGEX, KCBT

and CBOT wheat futures respectively.

The review of price changes and spread relationships enable A&I staff to detect unusual 

price movements and aberrations in price relationships that could be indicative of an underlying 

problem in the market. If A&I detects substantial differences in price relationships, staff will 

investigate to ascertain the possible reasons for the discrepancies and evaluate the effect on the 

market, particularly in the nearby month. 

Although A&I did not detect any significant price abnormalities during the target period, 

A&I intensified surveillance of the hard red spring wheat futures contract from October 2007 

through March 2008 as a result of a sharp increase in the price of the wheat contract and 

unprecedented volatility. During the period of high volatility, the price of wheat in the cash 

market advanced much faster than the price of the futures contract. A&I determined that since 
19

futures prices were capped and cash prices were not, the futures market no longer represented the 

true futures price and the futures/cash basis became temporarily distorted. MGEX worked 

closely with Division staff during this period to discuss wheat prices, trading volume, any large 

position holders in the market, and whether any margin calls had been received by the Exchange. 

A&I concluded the volatility was caused by a tight supply in the wheat market with stocks 

reaching a 30-year low as the available supply was unable to keep pace with the rising global 

demand. The Division believes the heightened surveillance of the wheat market was essential 

for the Exchange in order to fulfill its self-regulatory responsibilities. However, the Division 

also believes that the heightened surveillance should not interfere with the normal functioning of 

the Compliance Department, including the timely completion of substantive investigations, 

which is discussed below in the Trade Practice Surveillance section.

15

 3. Deliverable Supplies 

A&I monitors the availability of deliverable supplies to ensure the orderly liquidation of 

its hard red spring wheat contract, which is MGEX’s only physically delivered contract, by 

reviewing the Stocks of Grain Report. The Stocks of Grain Report is prepared by A&I staff each 

Monday and is released the following Tuesday. This report is compiled by using data obtained 

by the Exchange from reports submitted by grain elevator operators. The report details the 

deliverable, non-deliverable (including ungraded), and Commodity Credit Corporation stocks of 

grain held in the Exchange-approved warehouses.16 Additionally, the report compares figures 

from the previous week and for the same week in the previous year, which allows A&I to assess 

 

15 Investigations 06-I-33 and 07-I-01 are discussed in detail in Section (VII)(C)(2) on pages 47-49 of this report.

16 The Exchange-approved warehouses are the Minneapolis-St. Paul-Red Wing, Minnesota, Duluth, Minnesota, and 

Superior, Wisconsin switching districts, which are the delivery points for the hard red spring wheat contract. 
20

any adverse changes.17 The report is also used to determine if there is an adequate supply of 

grain with dispersed rather than concentrated ownership, and whether there are sufficient stocks 

of grain available for delivery. A&I assesses tight supplies and any concentrated ownership that 

can make the market susceptible to manipulation and monitors the availability of deliverable 

grain in relationship to open interest and concentration of positions. A&I contacts parties with 

outstanding warehouse receipts to confirm ownership; and regularly monitors railroad receipts, 

vessel shipments, and registered warehouse receipts to verify deliverable supply of hard red 

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

4. Heightened Surveillance of Expiring Contracts

The heightened surveillance of expiring contracts typically begins when a futures 

contract becomes the nearby contract, or on the first day of the month prior to the month in 

which an option contract expires.18 Enhanced options surveillance begins on the first day of the 

month the options contract expires. 

As expiration approaches, A&I uses a number of computer-generated reports to monitor 

each clearing member’s gross house (regular) and customer (segregated) account to ensure that 

futures contracts are liquidated in an orderly fashion and that options are properly exercised. 

A&I reviews the Open Share of Market and Volume and Open Interest by Clearing Member 

Reports to detect problems of potential concentration of positions among clearing members. The 

Open Share of Market report also allows A&I to monitor the largest three long and short position 

holders in the nearby futures contract. If a clearing member has 75 percent or more of the open 

 

17 A&I monitors for any material changes in deliverable supply of 10 percent or more and contacts the grain elevator 

operator directly to verify the accuracy of the supply information and the reason for such a change.

18 For example, heightened surveillance of the September 2007 hard red spring wheat futures contract began in the 

last week of July 2007 when the July 2007 contract expired. For the September 2007 options contract, heightened 

surveillance began on August 1, 2007, since the last day of trading and expiration day was August 24, 2007.
21

market share in an expiring futures contract, A&I will generally contact the clearing member to 

determine the intentions of the clearing member’s customers and to ensure that customers with 

short positions are capable of making deliveries if they intend to maintain their positions into the 

delivery period.

A&I also reviews the Account Name Position Analysis Report (―ANPAR‖) to monitor 

positions and position holders.19 This report is used by A&I as a risk management tool to 

identify position holders and their ability to make or take delivery. Further, A&I monitors open 

interest by comparing the open interest in expiring contracts to the weekly Stocks of Grain 

Report. Finally, A&I uses the ANPAR to determine if there is an adequate supply of grain with 

dispersed rather than concentrated ownership, and whether the concentrated ownership could 

make the market susceptible to manipulation.

Next, A&I monitors transfer trades for an expiring contract to ensure compliance with 

Exchange rules.20 Prior to the offset prohibition period, A&I sends out an offset deadline 

reminder to clearing members and posts a copy of the reminder letter on the Exchange website. 

A&I monitors the trading activity as the delivery period approaches to ensure that clearing 

members and their customers are not offsetting positions for the purpose of avoiding delivery 

and impacting the open interest. 

With respect to expiring options, A&I reviews the Delta Position Large Trader Report on 

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

 

19 The ANPAR details the position holders by name, account number(s), gross positions, and the percentage of the 

market held for each contract and contract month.

20 MGEX Rule 718.01 prohibits transfer trades that offset existing open positions during the delivery month. During 

the delivery month, and two business days prior to the first delivery day, transfer trades for the purpose of offsetting 

existing positions where no change in ownership is involved, is prohibited when the date of execution of the position 

being transferred is not the same as the transfer date. Such positions are required to be offset by trade activity or 

through the normal delivery process.
22

reportable options positions, the number of options positions (long or short, puts or calls), the 

expiration date, designation of commercial or noncommercial use, the FCM code, the CFTC 

reportable ID number, the delta (call or put), and the futures equivalent for calls or puts and long 

or short.21 This report enables A&I to monitor the largest options holders for both house and 

customer accounts. A&I also reviews the Exercise Trade Register Report, which is generated if 

any options positions were exercised on the prior business day. This report details the clearing 

member, premium, quantity bought or sold, and the exercise dollar amount plus any differences. 

A&I reviews the report to ensure that options are properly exercised, particularly those on the 

last trading day. A Report of Exercises is also published daily by the clearinghouse and details 

each clearing member’s options positions that were exercised. This report includes the opposite 

clearing member, the options contract exercised, the contract month, the quantity, and the strike

price.

An Options Expiration Reminder is sent to each clearing member about a week prior to 

expiration reminding them of the Exchange requirements for clearing members concerning 

options expiration. Pursuant to MGEX rules, the clearinghouse automatically exercises in-themoney options in all MGEX option contracts, unless notice to cancel is given by the clearing 

member to the clearinghouse.22 Each clearing member also receives the In-The-Money Report 

Summary, which provides details for each in-the-money option. The report summary includes 

the FCM code, the number of long and short options positions held, name of the house or 

customer account holding the option, and the settlement price of the expiring contract. A&I 

 

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

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

22 MGEX Rule 1404.01.
23

verifies that the clearinghouse received a written notification from the clearing member in the 

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

A&I also works with the Commission’s market surveillance staff and other government 

agencies prior to the expiring futures contract to share information, to monitor the delivery 

process, and to advise market participants of their responsibilities to ensure an orderly 

liquidation. Although all MGEX futures and options contracts were liquidated in an orderly 

manner during the target period, A&I received two complaints regarding the liquidation of the 

expiring 2007 May hard red spring wheat futures contract. As a result, two investigations were 

opened to address concerns regarding possible manipulation or abusive trading practices, 

including a squeeze or non-justified economic trading activity.23 The complaints questioned 

whether a commercial with a large long position had the ability to take delivery, if there were 

adequate deliverable and alternate supplies available to MGEX market participants, and if 

artificial pricing existed due to the inverted prices for the May and July futures spreads.

The analysis conducted by A&I disclosed that the ownership of the available deliverable 

wheat stocks were dispersed among a large number of commercials and that their combined

ownership represented only a small fraction of the overall stocks. Moreover, the U.S.D.A. 

Marketing Services representative indicated that there were alternative available supplies in the 

cash market. A&I also determined artificial prices did not exist and that inverted prices for the 

May and July futures spreads have historically been a component of the MGEX marketplace. 

Thus, there was no indication that the commercial had a sufficient dominant position to affect the 

May and July market price.

 

23 A squeeze is a market situation in which the lack of supply tends to force shorts to cover their positions by offset 

at higher prices.
24

In sum, A&I determined the evidence did not support any findings of rule violations 

during the liquidation of the expiring May 2007 hard red spring wheat futures contract or 

delivery period. All speculative traders (non-commercials) were able to reduce their positions to 

within the speculative spot month position limits two days prior to the first delivery date. 

Additionally, all commercials were confirmed with the Commission to hold position levels 

deemed to be economically justified and within their respective speculative position limit 

exemptions or were offset by warehouse receipts. 

The Division’s review of the investigation files opened to address the complaints 

revealed that the investigations were thorough, well-documented, and included appropriate 

analysis to determine if there was evidence to support the claims of potential manipulation.

B. Large Trader Reporting and Speculative Limit Enforcement

During the target period, A&I received several large trader reports via encrypted email 

from the Commission’s Chicago office each week.24 These reports list the reportable MGEX 

accounts in futures and options and provide the account identification, expiration date, amount of 

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

noncommercial, strike price, clearing member code, and the name of the clearing member. A&I 

also receives the Delta Positions Large Trader Report on a weekly basis from the MGEX 

clearinghouse. This report is used by A&I to analyze large trader activity, monitor positions and 

position holders, and to determine the positions of hedgers versus speculators. A&I reviews all 

of these reports to monitor the activity of the largest traders in the market, identify and monitor 

 

24 Currently, MGEX receives the following reports on a daily basis: MGEX Wheat Combined (futures and options 

with futures equivalency adjustment); MGEX Wheat Futures Positions – Omnibus Accounts; MGEX Wheat Futures 

Positions – No Omnibus Accounts; MGEX Options – Omnibus Accounts; and MGEX Options – No Omnibus 

Accounts.
25

accounts approaching spot month, single-month, or all-month speculative position limits, and to 

detect potential concentration of positions that could disrupt the market.

MGEX is a unique contract market since the majority of trades involve agribusiness firms 

that utilize the marketplace for hedging purposes. Thus, speculative positions are significantly 

less common at MGEX than at other exchanges. Nevertheless, A&I still monitors for 

compliance with speculative position limits.25 If an account approaches the speculative limits, 

A&I will contact the clearing member to determine whether the clearing member has a hedge 

exemption on file for that account. If a speculative limit violation is detected, an investigation 

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

and possible sanctions.

During the target period, one account exceeded the all-months limit in MGEX hard red 

spring wheat futures for a three-day period. The Exchange’s investigation file indicated that the 

account holder did not intend to exceed the speculative limit. The account holder self-reported 

the violation to the Exchange and the Commission once it became aware of the violation. The 

account holder also reduced the positions immediately to comply with the speculative limit. The 

speculative limit violation was caused by a new managed account that had not been properly 

monitored. As a result of the violation, internal controls were implemented by the account 

holder to prevent future occurrences. The speculative limit violation also revealed that the 

parties involved did not fully understand the hedge and speculative position limit issues when 

combined with the positions held across multiple exchanges. Commission staff determined that 

the positions held by the account were not considered bona fide hedge positions and the account 

 

25 The Exchange has adopted the federal speculative limits pursuant to Part 150 of the Commission regulations.
26

was reclassified as a non-commercial account. In view of the fact that the account holder had no 

prior speculative limit violations, the Exchange issued a staff warning letter.

Division staff reviewed the investigation file and found the file to be complete and 

included appropriate analysis to support the Exchange’s findings. 

C. Monitoring of Futures for Physicals and Exchange of Futures for Risk Transactions

MGEX rules allow for two types of trades to be executed off the centralized market—

transactions in futures made either in connection with Exchange of Futures for Physicals 

(―EFP‖), for the purpose of establishing the price of cash commodities, and Exchange of Futures 

for Risk (―EFR‖) transactions, which involve the exchange of futures contracts for or in 

connection with over-the-counter (―OTC‖) derivative transactions.26 The majority of ex-pit 

transactions are EFPs typically executed by commercials who have hedged their cash positions

in the futures market. During the target period, a total of 333,411 EFPs and EFRs were 

executed, which accounted for approximately 12 percent of the Exchange’s total futures volume. 

Trade data for EFP and EFR transactions are submitted to the clearinghouse and must include the 

clearing member, price, quantity, commodity, contract month, and the appropriate symbol 

identifying the trade as EFP or EFR.27

Pursuant to Exchange rules, the EFP and EFR transactions may be transacted at prices 

mutually agreed upon by the two parties to the bona fide transaction. If the price of an EFP 

cannot be mutually agreed upon by the date of shipment, the cash commodity buyer has the 

 

26 The Exchange amended MGEX Rule 719.00 in 2004 to permit the exchange of futures in connection with OTC 

transactions in all futures contracts. Pursuant to MGEX Rule 2011.02, the last day that the NCI, NSI, or Wheat

index futures contract may be exchanged for, or in connection with, an EFP or EFR transaction shall be the last 

business day of the contract month. The last day that a spring wheat futures contract may be exchanged for, or in 

connection with, an EFP or EFR transaction shall be the sixth business day following the last trading day of the 

contract month. 

27 MGEX Rule 719.00.
27

option to set the price within that day’s trading range. An EFP or EFR executed during trading 

hours of the underlying futures contract must be submitted the same day for clearing. An EFP or 

EFR executed after the close of trading of the underlying futures contract must be submitted for 

clearing no later than the next business day.28

A&I reviews EFPs and EFRs during the course of their annual routine audit trail reviews 

of each clearing member. In this connection, A&I requests the underlying documents for all 

EFPs and EFRs transacted by the clearing member, such as confirmations, invoices, warehouse 

receipts, document of title, master swap agreement, and reviews them to verify that the 

transactions are bona fide and that the necessary cash transaction documentation exists. No EFP 

or EFR irregularities were found by A&I during its reviews. Division staff reviewed each of the 

audit trail reviews and also did not identify any irregularities with the EFP and EFR transactions 

that warranted further investigation. Division staff found that copies of the underlying 

documents are retained as part of the audit trail review files and investigation reports detail 

A&I’s findings.

A&I also reviews EFPs and EFRs as part of its daily review of the Time Audit Report 

(―TAR‖), the Exchange’s trade register, for possible violations. A&I reviews EFPs or EFRs that 

have the same clearing firm and account numbers on both sides, involve unusually large 

quantities, or are priced outside the daily trading range. If irregularities are noted, A&I will 

contact the clearing member or account owner to request documentation verifying the bona fides 

of the EFP or EFR.

One EFP investigation was opened as a result of the TAR review during the target period. 

In Investigation 06-I-37, A&I requested the supporting documents for three EFP transactions 

 

28 Id.
28

from a clearing firm to confirm that each transaction was a bona fide EFP. However, the firm 

was unable to produce any of the documents requested by A&I. As a result, A&I issued a staff

warning letter to the firm for violating MGEX Rule 719.00. After the close of Investigation 06-

I-37, A&I opened Investigation 07-I-27 to follow-up with the same clearing firm to ensure that it 

was complying with the Exchange’s EFP recordkeeping requirements. In the follow-up 

investigation, A&I found that the firm complied with the Exchange recordkeeping rules and the 

case was closed without any disciplinary action. 

D. Conclusions and Recommendations

MGEX maintains an adequate market surveillance program. A&I monitors cash and 

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

of large trader positions relative to total open interest and deliverable supply. Surveillance of 

expiring contracts focuses on monitoring the largest long and short position holders, open 

interest, adequate grain supplies with dispersed rather than concentrated ownership, and the 

ability of short position holders to make delivery.

During the target period, A&I opened two investigations to address concerns regarding 

possible manipulation or abusive trading practices, including a squeeze or non-justified 

economic trading activity in the expiring May 2007 hard red spring wheat futures contract. After 

a comprehensive review, A&I found there was no evidence to support the claims. The 

Division’s review of the investigation files disclosed that the investigations were welldocumented and included a comprehensive analysis to support their findings.

A&I reviews several large trader reports to analyze large trader activity and monitor 

positions. These reports enable A&I to identify and monitor accounts approaching spot month, 

single-month, or all-month speculative limits, and to detect potential concentration of positions 

that could disrupt the market. At the end of the target period, one account exceeded the all-
29

months limit in MGEX hard red spring wheat futures for a three-day period. The account holder 

self-reported the violation to the Exchange and the Commission, and reduced the positions 

immediately to comply with the speculative limits. 

The Exchange also has adequate procedures for monitoring reportable positions, 

enforcing speculative position limits, and reviewing EFP and EFR transactions to verify the 

legitimacy of such transactions.

The Division has no recommendations in this area.

VI. AUDIT TRAIL PROGRAM

Core Principle 10 – Trade Information:

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

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

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

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

the contract market.

Core Principle 17 – Recordkeeping:

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

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

period of five years.

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

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

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

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

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

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

must be able to track a customer order from time of receipt through fill allocation or other 
30

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

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

Original source documents include unalterable, sequentially identified records on which 

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

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

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

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

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

fills are allocated. Electronic analysis capability permits sorting and presenting data included in 

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

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

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

other loss.

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

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

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

during the first two years. However, trading cards, documents on which trade information is 

originally recorded in writing, and order tickets, must be retained in hard copy for five years.

A. Audit Trail for Electronic Trading

As discussed above, all electronic trading at MGEX is conducted on Globex, the CME

Group’s electronic trading platform. CME Globex creates a comprehensive audit trail for 

electronic trades by automatically recording all messages entered into the system, and retaining 

them in a database for five years. The retained information includes all orders, order changes 

and order cancellations, all trades matched by the system, and the date and time of each message 
31

and each matched trade, recorded to the nearest millisecond. No message, whether it consists of 

an order, order modification or cancellation, can be erased from the system. 

Orders for MGEX contracts may be entered into Globex by MGEX members; by clearing 

members or the futures commission merchants (―FCMs‖), introducing brokers (―IBs‖); or other 

clients they guarantee; or by customers of such guaranteed FCMs or IBs using a CME-certified 

front-end system to transmit their own orders. Each person who enters an order into Globex 

must first log on to the system with a unique workstation user identification ID (―Tag 50 ID‖ or

―ID‖) that identifies the individual operator and is included in the data retained by the system 

with respect to every order.29

Tag 50 IDs are assigned to MGEX traders that access Globex by MGEX clearing 

members. Traders can access Globex from a variety of front-end applications that are available 

from the CME Group, FCMs, IBs, and independent software vendors (―ISVs‖).30 Traders can 

also connect to Globex through the Internet or through the network or data center of an FCM, IB, 

or ISV. Additionally, traders can connect to Globex using an electronic order routing system 

through iLink, the CME Group’s Globex Application Program Interface. Each MGEX clearing 

member assigns a unique ID to each person who enters orders into Globex through the iLink

connection point.31 All automated trading system (―ATS‖) orders entered into Globex must be 

 

29 The Tag 50 IDs are not case sensitive. For example, ―ABC‖ and ―abc‖ would be viewed as the same Tag 50 ID. 

30 The CME Group Globex Access Directory lists 13 ISVs that are certified for compliance with CME Globex and 

provide front-end trading access for trading of MGEX contracts.

31 The CME Globex order entry interface iLink provides direct access to Globex markets and supports all of the 

enhanced functionality available on the platform. iLink is based on the FIX 4X protocol and supports customized 

trading systems for order entry, modification and cancellation, receipt of order confirmation, and fill information.
32

submitted with a Tag 50 that identifies the person who operates, administers and/or monitors the 

ATS.

32

MGEX maintains a record of the workstation operator IDs issued by the clearing 

members that are registered with MGEX. The Exchange requires each clearing member to 

guarantee and assume financial responsibility for all orders it places and receives, and all 

contracts it clears through Globex.33 MGEX rules also require that all written orders and any 

other original records pertaining to transactions effected through Globex to be retained for five 

years.34 

Pursuant to MGEX rules, all members and nonmembers must sign a customer account 

agreement and establish an account with an Exchange clearing member before they are provided 

access to Globex.35 Exchange rules require each participant to maintain confidentiality with 

respect to IDs and the participant is responsible for the security of their trading terminals that 

access Globex.36 A&I manually reviews cleared trade activity to detect potential sharing of Tag 

50 IDs. The Exchange also collaborates with clearing members to detect any potential user 

identification violations. No user identification violations were detected during the target period. 

The audit trail for each electronic order includes the commodity, price, quantity, contract 

month, customer type indicator (―CTI‖) code, order type (and order qualifier, stop price or 

trigger price, if applicable), order number, and account number. All of this information must be 

 

32An ATS is a system that automates the generation and routing of orders to Globex. The individual who 

administers and/or monitors the ATS is considered to be the ATS operator. This person in this role typically 

initiates or disables particular algorithms or strategies, adjusts the parameters of the automated program(s), or 

monitors the live trading of the ATS.

33 MGEX Rule 1801.00.

34 MGEX Rule 1811.00.

35 Id at 33.

36 MGEX Rule 1814.00.
33

entered into the system before Globex will accept an order. For modified or cancelled orders, 

audit trail data includes a record of the nature of the modification or cancellation. For executed 

orders, the data also includes complete fill information. A written order must be prepared for 

orders that cannot immediately be entered into the system and be entered when the orders 

become executable in the sequence in which the orders were received. All customer orders must 

be entered before a member or clearing member can enter orders for accounts in which they have 

a personal, financial, or proprietary interest.37 All orders are matched according to an algorithm 

that gives priority to orders at the best price and orders with the same price based upon the time 

of entry into the system.38 

A&I staff access MGEX trade activity through the CME Group Market Operations tools 

using FirmSoft, a web-based system that is accessible through CME Group Connect (via the 

Internet), to reconstruct audit trail data for electronic transactions. A&I staff use FirmSoft as 

part of their daily surveillance activities and the system has the capability to drill down and allow 

staff to go from a summary to a detailed analysis as needed. This system maintains current 

market data for executed trades for three trading days and A&I staff can customize searches of 

historical data that is stored on the Exchange’s clearinghouse system (AS 400). 

B. Enforcement of Electronic Audit Trail and Recordkeeping Requirements

The Division found that, while the Exchange conducts regular reviews of compliance 

with its open outcry audit trail and recordkeeping requirements (discussed below), it does not 

conduct reviews to enforce compliance with its audit trail and recordkeeping requirements for 

electronic trading. A program of regular reviews of trader compliance with electronic audit trail 

 

37 MGEX Rule 1807.00.

38 MGEX Rules 1808.00 and 1809.00.
34

and recordkeeping requirements is an essential component of an adequate exchange compliance 

program and continuing exchange compliance with Core Principles 10 and 17. This is 

particularly true in light of the explosive industry-wide growth of electronic trading in recent 

years and the shift of nearly all of the Exchange’s trading volume from open outcry to Globex 

that occurred after the target period. Therefore, the Exchange must move promptly to put such a 

program in place.

A satisfactory program for timely review of compliance with electronic audit trail and 

recordkeeping requirements would include examination by Exchange staff of randomly selected 

samples of front-end audit trail data for order routing systems. In such a review, investigators 

would verify for each order in the sample data that all required data fields are present and that the 

order’s receipt and transmission into Globex are properly recorded. For example, Exchange staff 

would verify that the following data fields relating to order entry are present: transaction date, 

product, Exchange code, expiration month, quantity, order type, order qualifier, price, buy/sell 

indicator, stop/trigger price, order number, unique transaction number, account number, session 

ID, Tag 50 ID, host order number, trader order number, clearing member, type of action, action 

status code, CTI code, origin, and timestamp. For executed trades, the audit trail examination

would verify that the execution time of the trade has been recorded along with the fill 

information. The samples would also be used to verify that all firms and individuals required to

do so by Commission regulations and MGEX rules are retaining front-end electronic audit trail 

data for five years, and have it readily available for the most recent two years.39 In addition, for 

all firms that issue the Tag 50 IDs, A&I would review the firm’s procedures for assigning the 

IDs and maintaining current information regarding the registered user of each ID, and verify the 

registered user information for a random sample of the IDs issued by the firm. 

 

39 See Commission Regulations §§ 1.31 and 1.35.
35

A satisfactory program would also include regular testing and verification of the use of 

the Tag 50 IDs, in order to ensure as far as practicable that all persons entering orders that reach 

the system are complying with identification requirements. For example, an exception report 

listing instances where a single ID issued to an individual has been logged in for all or most of an 

entire day or days, or an exception report which shows that a single ID was being used to trade 

multiple products, would trigger further investigation of whether the identifier in the report was

being used improperly. Moreover, a satisfactory program would also verify whether firms that 

are issuing the Tag 50 IDs (that are unique to each individual) are not being shared by multiple 

parties at the firm. Since Tag 50 IDs are not case sensitive, A&I would review whether the firm 

is ensuring uniqueness by means other than solely modifying the letter between different Tag 50 

IDs. 

Finally, an appropriate electronic recordkeeping and audit trail review program would 

include assessment of compliance in this area by each clearing member. In particular, the 

program would use computerized reports to test the accuracy of the account numbers and CTI 

codes submitted by clearing members. Where CTI codes for given accounts are entered 

incorrectly, the firm would be required to explain and correct inaccurate CTI data. A&I staff 

would note any account number corrections made by the firm prior to trade clearing, and require 

the firm to explain unusual or frequent account number changes and correct any problems found. 

A&I staff would also assess whether all clearing members who are guarantors with respect to 

electronic trading system trading are maintaining electronic audit trail data in the manner 

required by Exchange rules and Commission regulations. 

The program of electronic recordkeeping and audit trail reviews that the Exchange should 

put in place should enable the Exchange to identify firms and individuals that have not 

maintained generally high levels of compliance with all of the Exchange’s electronic 
36

recordkeeping and audit trail requirements. It should also enable the Exchange to take 

appropriate disciplinary action and conduct appropriate follow-up review wherever deficiencies 

in compliance are found.

Since the Exchange does not now have a program of electronic recordkeeping and audit 

trail reviews, the Division believes that development and execution of the necessary program 

may require the Exchange to increase the size of the A&I staff. The Exchange should move 

promptly to assess the staffing needed for such a program, and add sufficient staff to ensure its 

prompt development and effective use.

C. Audit Trail for Open Outcry Trading

1. Open Outcry Orders

MGEX requires that members receiving customer orders for options trading to prepare a 

written record upon receipt in non-erasable ink and include the account identification, order 

number, and a timestamp to reflect the date and time to the nearest minute.40 The orders are 

written on order tickets by clearing member staff. Typically, order tickets are walked into the 

trading pit and handed to a broker for execution. Upon execution, the broker records the 

essential trade data and returns it to the clearing member’s desk on the trading floor where the 

order is timestamped again.

MGEX members record personal trades on double-sided pre-printed sequenced trading 

cards, with buys on one side and sells on the other.41 Each trading card includes the member’s 

name, clearing member’s name, date, quantity, commodity, contract for future delivery or 

 

40 MGEX Rule 756.00. During the target period and up until the closing of the trading floor for futures trading, 

members were required to follow MGEX rules applicable for open outcry orders.

41 MGEX Rule 2062.00. 
37

physical, delivery month or expiration date, price, transaction time to the nearest minute, 

opposite broker or trader, opposite clearing member, and for options, premium, strike price, and 

a put or call indicator.42 Members are required to record purchases and sales in non-erasable ink, 

in exact chronological order of execution, on sequential lines of the trading card without 

skipping lines between trades, and crossed out any remaining lines on the trading card. Opening 

and closing periods are also required to be identified.

Trading cards are collected by clearing members within 15 minutes of each designated 

30-minute interval, and clearing members submit the trade data to the MGEX clearinghouse 

through the Exchange’s automated trade data entry and matching system (―TEMS‖). TEMS 

enables clearing members to enter data directly from order tickets and trading cards into 

computer terminals that are located typically in the clearing firm’s booth on the trading floor. 

Transactions are required to be entered into TEMS within 45 minutes of the conclusion of each 

30-minute interval.43

2. Trade Timing for Open Outcry Trades

MGEX requires both the buyer and seller of each options transaction to manually record 

the time of each trade to the nearest minute on his or her trading card. The Exchange enforces

this requirement by reviewing the Time Audit Report on a daily basis. The TAR contains time 

and sales data, thereby incorporating a comparison of the matched trades to the time and sales 

data. The purpose of this comparison is to determine whether a match could be made between 

 

42 Members were required to record indicators for the following transactions: (C) cash exchange, (T) office transfer,

(S) spread, and (D) delivery.

43 MGEX Resolution 2101.C. provides that clearing members have until 3:00 p.m. to resolve any unmatched trades. 

Any unresolved transactions may be suspended pending possible resolution the following business day as an ―as of‖ 

trade. ―As of‖ trades can be carried no longer than one business day.
38

the trades reported by members on their trading records and prices and times of execution 

reported in the time and sales data.

The TAR identifies five types of timing errors that may be indicative of a trade timing 

violation. Any discrepancies in excess of one minute automatically generate an error code on the 

TAR trade exception report. The five error codes are: Bought Side-No Trade (―B-NT‖),

44 Sold 

Side-No Trade (―SNT‖),45 Time Out of Limits (―TOL‖),46 Bought Side-Untimed Trade (―BUT‖),47 and Sold Side-Untimed Trade (―SUT‖).48

In addition to reviewing the TAR, A&I assesses the accuracy of each member’s manually 

recorded execution times by reviewing the Broker Error Type Report (―BETR‖). The BETR is a 

compilation of error codes derived from the TAR and summarizes the number of errors by type 

for each member on a daily or monthly basis along with a cumulative total for each member. 

If A&I finds that a member’s trade timing deficiency level exceeded the daily or monthly 

thresholds,

49 A&I examines the underlying trade documents as well as the time and sales data to 

determine the ―audited‖ error threshold. The ―audited‖ rate includes adjustments based on the 

cause of timing errors, such as keypunch errors by clearing member personnel, a member 

 

44 The TAR compares the time recorded by the buyer to the time and sales data. If no trade is indicated on the time 

and sales at the time recorded by the buyer, or within one minute proceeding or one minute following that time, the 

trade is assigned a code of B-NT.

45 The computer program followed the same procedure as the B-NT code, but compares the seller’s recorded time to 

the prices recorded on the time and sales.

46 The TOL error code is generated if the times recorded by both the buyer and the seller are marked as accurate by 

the system, but there is more than one minute between the two times.

47 The B-UT error code is assigned to the buyer if a trade clears without a transaction time on the buy side.

48 The S-UT error code is generated and assigned to the seller if a trade cleared without a transaction time on the sell 

side.

49 On a daily basis, a member with a 20 percent total timing error rate with at least 20 timing errors may be 

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

a 10 percent total timing error rate with at least 20 timing errors may be investigated. In addition, all trades cleared 

without trade times are subject to investigation.
39

recording an incorrect time of execution on the original source document, or a member’s 

illegible handwriting. Timing errors can also be attributed to a member failing to promptly 

report the trade to the MGEX market observer (―ring reporter‖) or not reporting the trade at all, 

as well as the market observer not recording the trade promptly or never recording the trade.50 If 

the audited error rate is found to be under ten percent, the member receives a reminder letter. If 

the audited error rate is found to be more than ten percent, the member receives a staff warning 

letter. If members are found to be repeatedly negligent in recording accurate times of execution, 

or fails to report transactions to the market observers, they may be subject to disciplinary action 

by the Futures Trading Conduct Committee (―FTCC‖).

The Exchange closed seven investigations based on timing error rate thresholds during 

the target period. As a result, the Exchange issued three staff reminder letters, one staff warning 

letter, two investigations resulted in no action, and one investigation was referred to the FTCC. 

The limited number of investigations opened can be attributed to a high rate of compliance by 

MGEX members. In this regard, the Exchange’s monthly timing accuracy rate for all hard red 

spring wheat futures and options contracts combined during the target was approximately 95 

percent. 

D. Floor Order Tickets and Trading Cards

MGEX conducted an annual audit trail review of each clearing member during the target 

period to evaluate compliance with the Exchange’s order ticket and recordkeeping requirements. 

For each review, A&I randomly selected one trading day and examined all of the clearing 

member’s trading cards and order tickets for the review.

 

50 MGEX Rule 725.01. Each party to a futures or options transaction made competitively in the pit must promptly 

notify the market observer(s) of the price at which the trade has been executed. 
40

During the target period, A&I opened 23 audit trail reviews.51 Twenty-two reviews were 

also closed during the target period, including five opened prior to the target period. At the end 

of the target period, seven audit trail reviews remained open.

In the course of the 22 closed audit trail reviews, A&I examined a total of 511 order 

tickets prepared by the fourteen clearing firms and 250 trading cards prepared by 42 floor 

members whose trades were cleared by those firms on the dates selected for the reviews. As a 

result of these reviews, the Exchange issued four staff warning letters and 59 staff reminder 

letters for recordkeeping, submission, or timestamping deficiencies. A&I found a high rate of 

compliance with the Exchange’s recordkeeping requirements in the 22 audit trail reviews. All 

order tickets examined by A&I contained account identification, and 99 percent included both 

entry and exit timestamps. With respect to personal trading cards, all trading cards were written 

in non-erasable ink and 97 percent of the cards had transactions recorded in sequence, no skipped 

lines, and included the date, commodity, price, quantity, and put or call indicator for option 

trades. Additionally, the opening and closing periods were properly identified in 98 percent of 

the trading cards. Finally, 96 percent of all cards were collected by the clearing firm within 15 

minutes of each 30-minute trading interval, 95 percent of the trading cards reviewed were 

preprinted with members’ identification and trading card sequence number, and had unused lines 

properly marked through.

The Division reviewed the audit trail reviews closed during the target period and found 

that they were thorough and well-documented. Each file included a summary of the 

 

51 There were 17 clearing firms at MGEX during the target period. A&I conducted audit trail reviews of eight 

clearing firms twice during the target period. Audit trail reviews were not conducted for three of the 17 firms during 

the target period. Two of these firms did not clear any open outcry trades during the target period and one firm did 

not begin clearing MGEX transactions until February 2008, and MGEX initiated a review of this firm after the close 

of the target period.
41

investigation, copies of original source documents, spreadsheets and other documents detailing 

the findings of each transaction reviewed, an investigation report, and copies of disciplinary 

letters (where applicable).

E. Safe Storage Capability

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

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

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

during the first two years. Acceptable methods of record retention include electronic storage 

media for both the two and five year periods.

MGEX can access complete audit trail data for both electronic and open outcry trading on 

the AS 400, the Exchange’s clearinghouse system, which is located at the Exchange’s 

headquarters.52 The Exchange also has a back-up server, located on a separate floor of the 

Exchange building, which stores this data. Additionally, the Exchange stores the audit trail 

electronically at an off-site facility. The Exchange also copies the audit trail data onto tape backup cartridges that are retained with clearinghouse staff each evening. The data on the back-up 

and off-site servers, as well as and the tape cartridges, are retained for at least two years. 

Furthermore, MGEX creates daily back-ups of all audit trail data on the Exchange’s general file 

server, which is housed at MGEX’s data center in the Exchange building. As an additional 

safeguard, the data from the general file server is sent off-site daily over the Internet via an 

encrypted application to a Minneapolis-based vendor contracted by the Exchange. The data

transmitted to the vendor is simultaneously replicated to multiple sites in the Minneapolis 

 

52 Copies of each day’s TAR, time and sales, and TEMS clearing data are stored on the AS 400 production server, a 

back-up server located at the Exchange’s headquarters, and a back-up server at an off-site facility.
42

suburbs and to a data hosting center in New Jersey. Archived data for electronic and open outcry 

trading is stored for five years at off-site servers. MGEX also retains five years’ worth of trade 

data in hard copy form, stored in a vault in the Exchange building.53 Finally, MGEX’s audit trail 

data for open outcry and electronic trading is transmitted over the Exchange’s local area 

network, wide area network, or the Internet to a disaster recovery site that also serves as a data 

operations center for the Exchange, and is located a significant distance from the Exchange’s 

headquarters. 

F. Conclusions and Recommendations

The Division found that MGEX maintains an adequate audit trail program for open 

outcry trading, which records trade data in a manner that enables A&I to identify customer and 

market abuses and provide evidence of rule violations. The Exchange conducts an annual audit 

trail review of each clearing member to evaluate compliance with relevant recordkeeping and 

submission requirements. Members and clearing firms demonstrated a high rate of compliance 

with Exchange recordkeeping requirements during the audit trail reviews. The Division found 

that the audit trail reviews were thorough and well-documented. 

For electronic trading, MGEX maintains a complete electronic record of all orders 

entered and all transactions executed, including the terms and time of entry for each order, all 

order modifications, and all matched trades. This record enables MGEX to reconstruct 

electronic trading efficiently and effectively. However, the Exchange’s audit trail program does 

not include a programmatic review of the electronic audit and recordkeeping rules that is 

comparable in rigor and scope to its review program for open outcry trades. 

 

53 Trade data in hard copy form is maintained by A&I at the Exchange’s headquarters for approximately two months 

before it is transferred to the vault.
43

The Division found that MGEX has adequate safe storage capability for its trade data. 

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

copy form, and five years’ worth of electronic trading data. Both open outcry and electronic 

trade data are also stored off-site on an AS 400 server and back-up tape cartridges. 

Based on the foregoing, the Division recommends that: 

 The Exchange augment its audit trail compliance program for electronic trading to 

include a programmatic review of electronic audit and recordkeeping rules that is 

comparable in rigor and scope to its review program for open outcry trades. 

VII. TRADE PRACTICE SURVEILLANCE PROGRAM

Core Principle 2 – Compliance with Rules: 

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

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

limitations on access to the contract market. 

Core Principle 12 – Protection of Market Participants: 

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

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

participants. 

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

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

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

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

relevant data. 

An acceptable trade practice surveillance program should have systems that maintain all 

data reflecting the details of each transaction executed on the contract month. In this regard, the 

program should include routine electronic analysis of these data to detect potential trading 

violations. The program also should provide for appropriate and thorough investigation of all 

potential trading violations brought to the contract market’s attention, including member and 
44

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

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

pursuant to clear and fair standards.

A. Automated Surveillance System

The TAR and BETR serve together as the Exchange’s automated trade practice 

surveillance system for identification of possible trade practice violations for open outcry and 

electronic trading. The TAR combines the details of all futures and options trades in 

chronological order with Exchange time and sales data. The options trades are listed separately 

from trades executed on the electronic platform.

54

 The TAR generates error codes based on 

preset parameters that identify possible substantive trade practice abuses, such as wash trading or 

trading ahead.55 The system also identifies cross trades, which are referred to as ―ring trades‖ at 

the Exchange.56 On a daily basis, A&I staff reviews the error codes generated by the TAR as 

well as the BETR to look for patterns of exceptions concerning individual brokers.

57

 

54 The same was true of futures transactions when they traded on the floor.

55 The TAR generates error codes identifying potential instances of the following along with the applicable error 

codes: accommodation trading (―ACC―), buyer or seller trading ahead (―BTA‖ or ―STA‖), invalid CTI (―CTI‖), 

invalid ring trade (―IRG‖), invalid spread (―ISP‖), money pass (―MPS‖), no summary record (―NSR‖), price above 

daily high (―PAH‖), price below daily low (―PBL‖), post settlement trade error (―PTE‖), and wash trading 

(―WSH‖). During the target period, the Exchange implemented several new error codes on the TAR to enhance 

surveillance of the side-by-side trading environment. The new error codes are cross buyer or cross seller trade ahead 

(―CBA‖ and ―CSA‖), cross accommodation trading (―CAC‖), cross money pass through (―CMP‖), and cross wash 

(―CWS‖). The purpose of the new error codes is to enable A&I staff investigators to compare trading activity on the 

open outcry platform to the trading activity on the electronic platform to detect potential trade practice violations 

across the two platforms. These error codes are now limited to options contracts since all futures trade only on 

Globex.

56 A&I verifies ring trades by reviewing the written record that is completed and signed by the market observer at 

the time the trade was executed in the trading pit. 

57 Each staff investigator is assigned to conduct a daily review of the TAR in conjunction with preparing the Daily

Market Surveillance Log (―DMSL‖), which is discussed in Section (V)(A) on page 16 of this report. This 

assignment is rotated on an every-other-day basis between staff investigators.
45

B. Floor Surveillance

Staff investigators conduct floor surveillance during the openings and closings of all 

options contracts and at three randomly selected times throughout the trading session.58 One 

staff investigator is present on the trading floor five minutes prior to the open and remains on the 

trading floor five to 15 minutes after the open. If trading opens on a volatile note, the staff 

investigator remains on the trading floor to monitor trading until volume activity subsides. At 

the close, a staff investigator is present on the trading floor approximately 15 minutes prior to the 

close and remains on the trading floor several minutes after the post-settlement session. When a 

staff investigator conducts floor surveillance, the investigator monitors, among other things, 

trades executed prior to the opening or after the close, disclosure of orders, illegally executed 

ring (cross) trades, noncompetitive trading, improper bidding or offering, and transactions not 

executed by open outcry. Staff investigators also take into consideration account rules governing 

trading activities, such as the execution of ring trades, simultaneous purchases and sales, and 

spread transactions.

A&I documents floor surveillance in two logs, the ―pit population log‖ and ―price 

surveillance log.‖ Staff investigators complete a pit population log when floor surveillance is 

conducted during the opening and closing sessions. The pit population log lists the date and time 

period floor surveillance was conducted, the number of brokers in the various pits during several 

one minute intervals, observations of trades executed between brokers, and comments about 

current market activity. The pit population log can be used to verify who was on the floor at the 

time of a particular trade.59 

 

58 The Exchange conducted floor surveillance for all futures trading during the target period and up until the closing 

of the trading floor.

59 During the target period, nine non-substantive investigations were opened based on floor observations by A&I or 

trading floor staff. Investigation 08-I-06 resulted in a $125 fine against a floor broker for consuming food and a 
46

The price surveillance log is generated by the Exchange’s primary market data vendor to 

provide a snapshot of real-time quotes for the MGEX, KCBT and CBOT wheat, corn, and 

soybean markets. The price surveillance log is compiled for the opening and closing markets 

and randomly throughout the trading session depending on market conditions. 

C. Trade Practice Investigations

1. Initiation of Inquiries and Investigations

Pursuant to the guidelines in the Exchange’s Compliance Manual, an inquiry is initiated 

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

trades during any month, appear on exception reports regarding potential substantive trade 

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

violations whenever an initial staff review of exception reports, an investigator’s analysis of 

trade data, a floor surveillance observation, or an inquiry indicates that an investigation was 

warranted.60 Investigations are also opened for all customer or member complaints and all 

referrals by the Commission. 

As part of every investigation, A&I reviews all trades by the members involved which 

were executed during the review period selected for the investigation. Copies of all trade 

documents along with the TAR are maintained in the investigation file.

61 Notations regarding 

document requests and a summary of the analysis are documented in close proximity to the 

 

beverage in the trading pit in violation of Exchange rules. Investigation 08-I-13 resulted in a $25 fine against a floor 

broker for wearing blue jeans in the trading pit in violation of Exchange rules. Investigations 08-I-01, 08-I-03, 08-I05, 08-I-08, 08-I-12, 08-I-16, and 08-I-19 resulted in letters of reprimand for decorum or attire violations.

60 Inquiries, which are less formal than investigations, are opened whenever A&I staff encounters an anomaly which 

needs further attention and examination. A&I opens a formal investigation whenever it discovers possible violations 

of a serious nature or whenever an inquiry indicates a possible violation of Exchange rules which needs to be 

pursued further. 

61 Prior to January 2007, copies of irrelevant trade documents were discarded after the review was completed.
47

flagged trades on the TAR. At the conclusion of an investigation, A&I prepares an investigation 

report detailing the steps taken during the investigation and the reasons for A&I’s determination 

concerning what action, if any, should be taken.

2. Adequacy of Investigations

During the target period, the Exchange closed 15 trade practice investigations, including 

four opened prior to the target period and 11 opened during the target period. The Division 

thoroughly reviewed all of the 15 closed investigations and found that they were welldocumented and that the findings were supported by appropriate analyses. Each of the files 

included an A&I file cover sheet that provided a brief summary of events and an investigation 

checklist.62 The files also included copies of the TAR, time and sales data, copies of trade 

documents, copies of computer-generated reports, financial statement analysis, summary of 

trading activity, work papers, interview notices, summary of interviews, copies of relevant 

correspondence including emails, past disciplinary history, and copies of disciplinary letters. At 

the close of each investigation, A&I staff prepared an investigation report. The reports detailed

the source of the investigation, analysis, findings of facts discovered during the investigations, 

conclusions, and recommendation(s).

Of the 15 closed investigations, eight were generated based upon reviews of the TAR,

three resulted from floor surveillance by A&I staff, two resulted from customer complaints, and

two resulted from a CTI code review.

63

 Three of the 15 closed investigations involved potential 

 

62 The purpose of the A&I cover sheet is to summarize the various documents in the file and to inform the reader of 

the status of an investigation. The A&I cover sheet includes, among other things, the date the investigation was 

opened and closed, the alleged violations cited, the member and/or member firm under investigation, the source of 

the investigation, requests for documents, issuance of interview notices, violations cited, referral to a disciplinary 

committee, and any final action taken. Similarly, the purpose of the investigation checklist is to assist in the 

accurate, thorough, and timely completion of an investigation. 

63 The eight investigations generated based upon reviews of the TAR included seven for trade timing error rates and 

one for a cross sell trade ahead (―CSA‖). 
48

trade practice violations of a substantive nature. The first trade practice investigation of a 

substantive nature, Investigation 06-I-33, was opened to determine whether a floor broker 

executed trades during the closing period with the intent of affecting the settlement price, either 

up or down, for some personal benefit. A&I concluded that the evidence did not support a 

finding of a rule violation and the case was closed without any further action.

64

 The second 

investigation involving possible substantive trade practice violations, Investigation 07-I-01,

included a floor broker and clearing member that received staff warning letters for failing to 

ensure a customer order was executed openly and competitively in the pit by open outcry.65 

Last, Investigation 08-I-15 involved a member that compromised the integrity of the market by 

reporting bids that were not bona fide. This case was referred to the Business Conduct 

Committee (―BCC‖) for disciplinary action.

66

 

Although the Division found that all of MGEX’s closed investigations were thorough, it 

identified two issues of concern. First, the Division found that the interviews conducted by A&I 

 

64 A&I staff conducted a review of the closing range of the July 2007 hard red spring wheat futures contract that 

settled on October 12, 2006. The hard red spring wheat futures contract settled up 15 cents while the other MGEX 

hard red spring wheat futures contract month settlements included a settlement range of up 4 1⁄2 cents to down 13 1⁄2 

cents for the day. A&I staff observed a floor broker execute a July 2007 contract opposite another floor broker that 

appeared to be 10 cents higher than the last reported bid prior to the close. A&I concluded that this trade occurred 

during an upward trend in fast market conditions during the last minute of trading. 

65 A&I staff conducted a review of the December 29, 2007, and January 3, 2008, closing sessions for the March 

2008 hard red spring wheat futures contract. A&I staff observed that the December 29 settlement price of $5.05 3⁄4 

was out of sync with the settlement prices for the other hard red spring wheat futures contracts. Additionally, A&I 

observed floor broker ―A‖ execute trades for the personal account of floor broker ―B‖ during the closing sessions of 

both trading days that appeared to be unusual. Staff was concerned that floor broker ―A‖ executed the trades with 

the intent of affecting the settlement prices to benefit floor broker ―B.‖ A&I determined floor broker ―A‖ did not 

violate Exchange rules of bidding or offering above or below the market price in an attempt to manipulate the 

market on December 29. With respect to the closing session on January 3, A&I staff observed floor broker ―A‖ 

execute a market order to sell one contract during the closing period on behalf of floor broker ―B.‖ Since this was 

the only contract that traded during the closing period, the hard red spring wheat futures contract settled up 19 1⁄4 

cents from the December 29 closing price. A&I determined that there were no apparent bids reported to, observed, 

or inserted by the market observer during the minutes immediately following the receipt of the market order up to 

the execution of the market order by floor broker ―A‖ approximately 12 minutes later. Although floor broker ―B‖ 

did not suffer or any harm or complain of damages, the Exchange issued staff warning letters to floor broker ―A‖ 

and the clearing member for violating Commission Regulation 1.38. 

66 Investigation 08-I-15 is discussed in greater detail in the Section (VIII)(C) on pages 53-55 of this report.
49

of the subject brokers in Investigation 06-I-33 were not conducted in a timely manner. The 

interviews were conducted more than four months after the trades in question were detected. As 

a result, the interviews were ineffective since the brokers could not recall the precise 

circumstances under which the trades in question took place. The Division believes lengthy 

delays often prove detrimental to the quality of the investigation and to a compliance 

department’s case because over time witnesses tend to forget or cannot recall crucial information 

concerning a trading event.

Second, the Division is concerned that Investigations 06-I-33 and 07-I-01 were open for 

more than one year. The staff investigator assigned to both investigations left the Exchange prior 

to completing the investigations. During the Division’s rule enforcement interview, the Director 

of Compliance indicated that the delay in completing Investigation 06-I-33 was caused by ―other 

departmental priorities‖ and staff turnover required the Director to assume the responsibilities 

associated with completing this investigation. The Division believes that A&I staff turnover, the 

heightened surveillance of the wheat market during a period of high volatility, and the need to 

address two complaints concerning the liquidation of the May 2007 hard red spring wheat futures 

contract contributed to the delays in completing the investigations. The Division recognizes that 

delays in completing investigations in a timely manner can occur from time to time due to 

unanticipated circumstances, such as staff turnover and special projects. However, chronic staff 

turnover and the assignment of investigators to special projects should not interfere with the 

normal functioning of an exchange’s compliance department. The Division believes that lengthy 

delays in completing investigations have an adverse effect on the effectiveness of an exchange’s 

rule enforcement program because, among other things, prompt investigation and disciplinary 

action are necessary to discourage further violations of exchange rules. 
50

D. Conclusions and Recommendations

The Division found that MGEX generally maintains an adequate trade practice 

surveillance program. Staff investigators reviewed the TAR and the BETR to identify possible 

trade practice violations in open outcry and electronic trading. A&I conducted daily floor 

surveillance of open outcry trading during the opening and closing of all contracts and at 

randomly selected times throughout the trading session and continues to conduct appropriate 

floor trading of options trading.

A&I closed 15 investigations during the target period, three of which included potential 

substantive trading violations. The Division found that the 15 closed investigations were 

thorough, well-documented, and the findings were supported by appropriate analyses. 

Interviews were conducted in both trade practice investigations to obtain information 

critical to the trading events. However, the Division found that the interviews of the targets in 

one investigation were not conducted in a timely manner. The Division believes that the 

interviews were ineffective since the brokers could not recall the details surrounding the trades in 

question. Furthermore, the Division believes that timely interviews are essential to obtaining 

information necessary to reconstruct the events surrounding possible trade practice violations.

The Division also found that two investigations remained open for more than one year. 

Although both investigations required extensive analysis, the Division found that the delays in 

closing these investigations were caused by staff turnover, A&I’s limited resources, and other 

departmental priorities.

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

 Take appropriate measures, including hiring additional staff, to ensure that 

interviews are conducted promptly after a potential trading violation is identified 

and that investigations are conducted in a timely manner.
51

VIII. DISCIPLINARY PROGRAM

Core Principle 2 – Compliance with Rules:

The board of trade shall monitor and enforce compliance with the contracts to be 

traded and any limitations on access to the contract market. 

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

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

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

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

A. Disciplinary Committees and Procedures

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

and the Business Conduct Committee. The FTCC has jurisdiction over matters concerning 

futures and option trading, including consideration of possible trading violations, while the BCC 

has jurisdiction over all other potential violations, such as registration issues, clearinghouse 

matters, position limits and margins. The disciplinary committees do not have a regular meeting 

schedule, but meet on an as-needed basis when called to do so by the Chief Executive Officer 

and President after he approves an A&I recommendation that a matter be brought before one of 

the committees.

The FTCC consists of seven members, including the Chairperson of the Board of 

Directors (―Board‖), the Exchange President, and five members of the Exchange appointed by 

the Chairperson. The BCC is comprised of the Chairperson of the Board, the Chairperson of the 

Clearinghouse Committee, the Exchange President and four members appointed by the 

Chairperson of the Board. Pursuant to Exchange rules, the FTCC and BCC must include at least 

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

proceeding is a member of the Board, the BCC, or the FTCC, or where the allegations involve 
52

either price manipulation or financial harm to a nonmember. A BCC or FTCC member may not 

participate as a member of the Committee if the member has a financial, personal, or prejudicial 

interest or concern in the matter before the Committee. The Committees determine whether any 

of their members have such an interest or concern.

Upon receiving an investigation report from A&I, the FTCC or BCC may issue a notice 

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

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

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

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

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

the right to a hearing. The respondent has the opportunity to be represented by counsel, call 

witnesses, and offer evidence at a hearing. At the discretion of the respective disciplinary 

committee, A&I may be given authority to negotiate and/or accept a settlement with the 

respondent in satisfaction of the notice of charges. Both disciplinary committees have the 

authority to hold hearings on contested charges and function as a ―Hearing Committee‖ in such 

cases. 

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

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

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

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

$10,000 or more, and any expulsion, is subject to Board approval. A respondent can appeal the 

findings or penalty imposed by a disciplinary committee to the Board. However, appeals are 

heard at the discretion of the Board. If the Board takes an appeal, it is based on the record of the 
53

hearing. If a respondent does not file an appeal, the penalty becomes effective on the date set 

forth in the disciplinary committee’s decision.

A&I can also issue staff reminder letters and staff warning letters for infractions of 

recordkeeping, decorum, or other similar rules, without the matter being referred to a disciplinary 

committee. All staff reminder letters and warning letters are recorded in investigation files, and 

become part of the recipients’ disciplinary histories.

B. Reminder and Warning Letters

A&I issued a total of 16 warning letters and 62 reminder letters during the target period. 

One clearing member received five staff warning letters and two staff reminder letters during the 

target period. Three of the five staff warning letters and one of the two reminder letters were 

issued in an 11-month period for filing inaccurate position reports with the clearinghouse.67 

Additionally, the member had already been sanctioned $300 in 2005 for the same violation. The 

Division believes that absent mitigating circumstances, the Exchange should issue no more than 

one reminder and one warning letter to a member in a rolling 12-month period, and monetary 

sanctions should follow thereafter. The practice of issuing a series of warning or reminder letters 

is not an effective deterrent or incentive for the members to modify their behavior. 

C. Adequacy of Sanctions Imposed

During the target period, A&I referred one investigation to the FTCC that involved a 

member failing to report trade activity on a trading card.

68

 A&I also referred five additional 

investigations involving recordkeeping-type violations and one investigation involving 

 

67 See MGEX Rule 2100.00.

68 Investigation 07-I-20 resulted in a $750 fine against a member for violating MGEX Rules 725.01 and 2062.00.
54

substantive violations to the BCC. 69 Notice of charges were issued in all of the cases and all of 

the cases were concluded by settlement agreements. 

The recordkeeping-type violations included two cases of inaccurate reports to the 

clearinghouse and offsetting positions without the benefit of trade activity; one was limited to 

inaccurate reports to the clearinghouse; one was limited to offsetting positions without the 

benefit of trade activity; and one included a failure to submit a long position report to the 

clearinghouse. The investigation involving substantive violations concerned a member who

compromised market integrity by reporting bids in the hard red spring wheat futures market that 

were not bona fide.70 

During the target period (and including a time very shortly thereafter) MGEX assessed 

fines totaling $12,750 and imposed a 10-day suspension.

71

 The Division notes that the Exchange 

issued a meaningful penalty that included a $10,000 fine and a 10-day suspension in connection 

with Investigation 08-I-15, the case that involved substantive trading violations. The Exchange 

also imposed two $250 fines, three $500 fines, and one $750 fine in the six recordkeeping cases. 

The Division seriously questions whether any of the recordkeeping fines were of sufficient 

magnitude to have any deterrent value to ensure that these firms do not again violate the same 

rules. The Division believes more substantial sanctions are necessary to discourage future rule 

violations. 

 

69The Division notes that two investigations, Investigations 06-I-19 and 06-I-20, were referred to the BCC four days 

prior to the start of the target period. Given the limited number of investigations referred to the disciplinary 

committees during the target period and because both of these cases settled during the target period, the Division 

included these investigations in its review of MGEX’s disciplinary program. 

70 Investigation 08-I-15 was initiated after A&I observed the member bid-up the May 2008 hard red spring wheat 

contract on May 14, 2008, the last day to trade the May contract, from $13.00 to $23.00 in $1.00 increments. Since 

there was no activity in the May contract on that day, the contract settled at $23.00, which was $10.50 more than the 

settlement price on the previous day. A&I determined the bids offered by the member were not genuine. 

71 Investigation 08-I-15 closed on June 25, 2008, and was brought before the BCC two days after the close of the 

target period on July 2, 2008, and was included in the Division’s review due to the significance of the violations. 
55

The Division is further concerned about the adequacy of the sanctions imposed in two of 

the recordkeeping cases because they involved repeat offenders. First, in Investigation 06-I-20, a

clearing member was fined $500 fine for offsetting settlement month positions without the 

benefit of trade activity.72 A review of the member’s disciplinary history includes fines ranging 

from $500 to $1250 in three separate cases from 2001 to 2005 for violating the same or similar 

offset rules. While all three of those cases included an additional violation for failing to file an 

accurate position report with the clearinghouse, the Division believes a larger sanction was 

warranted in this case given the member’s history of violating the offset rules. The BCC only 

considered the disciplinary case from 2005 that resulted in a $500 fine as relevant in determining 

an appropriate sanction amount because the BCC only reviews disciplinary cases from the 

previous two years. 

Second, in Investigation 07-I-03, a clearing member was fined $250 fine for failing to 

submit an accurate position report to the clearinghouse and for offsetting delivery month 

positions without the benefit of trade activity.73 The member also was fined $250 in 2005 for 

filing an inaccurate position report to the clearinghouse. Thus, the member received the same 

fine in 2005 as the case from the target period even though the target period case also included 

the offset violation. The Division’s review of the Exchange’s investigation report indicates that 

the BCC did not consider the clearing member’s fine from the 2005 disciplinary case. The 

Division believes that the BCC should review and take into account a member’s complete 

disciplinary history in determining appropriate sanctions. 

 

72 MGEX Rule 7312.00 provides that transfer trades for the purpose of offsetting existing futures positions, where 

no change in ownership is involved, are prohibited two business days prior to the settlement month and during the 

settlement month when the date of execution or exercise of the position being transferred is not the same as the 

transfer date. Such positions are required to be offset by trading.

73 See MGEX Rules 2101.00.C. and 718.01.
56

D. Timeliness of Disciplinary Proceedings

 The Division found that the six investigations referred to the BCC and the one

investigation referred to the FTCC during the target period all were handled in a timely manner

once an investigation was submitted to a disciplinary committee. Five investigations were 

presented to the BCC and one investigation was presented to the FTCC within approximately 

one month of the date they were closed by A&I, and one was presented to the BCC within 

approximately two months of the date it was closed. Disciplinary action was completed in all 

seven matters within one month of their receipt by the BCC or FTCC. 

E. Conclusions and Recommendations

The Division found that the MGEX disciplinary program includes appropriate 

disciplinary procedures. The Exchange has the authority to investigate possible rule violations, 

prosecute cases, and discipline members who are found guilty. Respondents receive adequate 

notice of the claims against them, and have sufficient opportunity to present their defenses, call 

witnesses, and offer evidence. Respondents also are afforded the right to counsel, may enter into 

settlement negotiations and may appeal unfavorable decisions to the Board. 

The FTCC and BCC have the authority to conduct disciplinary hearings at the Exchange. 

The FTCC is responsible for matters concerning futures and option trading, including 

consideration of possible trading violations, while the BCC is responsible for all other potential 

violations, such as registration issues, clearinghouse matters, position limits, and margins.

During the target period, one investigation involving substantive trading violations and 

five investigations involving recordkeeping-type violations were referred to the BCC, and one

investigation involving a member that failed to report trade activity on a trading card was 

referred to the FTCC. All seven cases resulted in settlements with sanctions that included fines 
57

totaling $12,750 and a 10-day suspension. The Division found that all of the disciplinary matters 

were resolved in a timely manner.

The Division is concerned about the adequacy of the sanctions in the six cases involving 

recordkeeping violations. The fines in those cases ranged from $250 to $750. The Division’s 

concern is further exacerbated by the fact that two of the cases involved recidivist activity. In 

the first case, a clearing member that was fined $500 for violating the Exchange’s offset rules 

had previously been sanctioned by the Exchange on three separate occasions during the past six 

years for the same violation. In the second case, one of the clearing members that received a 

$250 for failing to file an accurate position report with the clearinghouse received the identical 

fine for the same violation in 2005. In both cases, the BCC did not take into consideration the 

members’ past disciplinary history from disciplinary cases that were older than two years. The 

Division believes that significantly larger sanctions were warranted in both cases. The Exchange 

should ensure that all sanctions are sufficient in magnitude to serve as an effective deterrent, 

particularly in those cases involving repeat offenders. 

The Division also found that one member was given three staff warning letters and one 

staff reminder letter during an 11-month period for filing inaccurate position reports with the 

clearinghouse. A policy of issuing repeated reminder and warning letters to members who 

repeatedly violate the same or similar rules, rather than issuing meaningful sanctions, renders the 

Exchange’s disciplinary program less effective. 

The Division therefore recommends that:

 The Exchange’s disciplinary committees should ensure that all sanctions imposed in 

connection with disciplinary matters are of sufficient magnitude to serve as an 

effective deterrent.
58

 The Exchange’s disciplinary committees should review a member’s complete 

disciplinary history when determining appropriate sanctions and impose 

meaningful sanctions on members who repeatedly violate the same or similar 

Exchange rules to discourage recidivist activity. 

 Absent extenuating circumstances, no more than one reminder letter and one 

warning letter should be issued in a rolling 12-month period before sanctions are 

imposed. 

IX. DISPUTE RESOLUTION

Core Principle 13 – Dispute Resolution: 

The board of trade shall establish and enforce rules regarding and provide facilities 

for alternative dispute resolution as appropriate for market participants and any 

market intermediaries.

Pursuant to acceptable practices set forth in Appendix B to Part 38, an exchange is 

required to provide customer dispute resolution mechanisms that are fair, equitable, and available 

on a voluntary basis. Customers should have the opportunity to have their claims heard and 

decided by an objective and impartial decision maker. In addition, each party should have the 

right to counsel, adequate notice of claims presented against him or her, and an opportunity to be 

heard on all claims, defenses, and counterclaims. The process should provide for a prompt 

hearing, as well as prompt, written final settlement awards that are not subject to appeal within 

the exchange. The parties should also be notified of the fees and costs that may be assessed. 

Finally, if an exchange provides procedures for the resolution of member-to-member disputes 

(not involving customers),the procedures for resolving such disputes must be independent of, and 

not interfere with, the resolution of customer’s claims or grievances.

A. Arbitration Procedures

MGEX provides dispute resolution services for resolving disputes between Exchange 

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

program‖). Customers of Exchange members can submit any dispute arising out of a trade made 
59

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

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

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

rules. 

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

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

Members are appointed to serve on the Panel by the Exchange’s President or Secretary.74 All 

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

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

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

make available any relevant documents in its possession.75

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

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

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

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

except where required under applicable law. 

There were no arbitrations at MGEX during the target period.

B. Conclusions and Recommendations

The Division found that MGEX’s rules provide fair and equitable procedures for the 

resolution of customer disputes. Each party has the right to counsel and each party receives 

adequate notice of the claims presented against them and an opportunity to be heard on all claims. 

 

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

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

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

relevant.
60

MGEX’s arbitration procedures require a prompt hearing and authorize prompt, written, final 

settlement awards that are not subject to appeal within the Exchange. Since there were no requests 

for arbitration filed during the target period, the Division was unable to evaluate the adequacy of 

the Exchange’s dispute resolution program.