New Rules on Futures Trading Proposed : Tighter Surveillance Would Include Monitoring of Deal Cards

Federal regulators proposed new trading rules Tuesday plus stepped-up trading floor surveillance to combat alleged fraud and other abuses in the nation’s futures exchanges.

The Commodity Futures Trading Commission, which oversees the futures industry, voted unanimously 5-0 to submit the package of rule changes for public comment.

The reform package, which includes increased surveillance on commodity exchange floors at the start and end of trading days, was first proposed after 46 brokers and traders in Chicago’s futures exchanges were indicted Aug. 2 on fraud and racketeering charges.

Those charges, stemming from a lengthy undercover federal probe of the Chicago Mercantile Exchange and the Chicago Board of Trade, included allegations that traders cheated their customers through falsified records and prearranged trades.

‘All Necessary Steps’

Critics have claimed that the traditional “open outcry” system of trading, in which participants use shouts and hand signals to make transactions in crowded, hectic trading pits, makes it difficult to track and detect fraud.

“The commission is committed to take all necessary steps to protect the public confidence in these markets,” said CFTC Chairwoman Wendy L. Gramm. “The action we are taking today will reinforce our regulatory system.”

The Chicago charges alleged that traders cheated customers by falsifying trading cards, which record purchase and sales information, or altering the time that trades were made to take advantage of price shifts in the market.

Some brokers allegedly conspired with exchange members who trade only for their own accounts, known as locals, to finalize trades after the close of the market to illegally try to set a more advantageous price.

In addition to tightening surveillance on the nation’s commodity exchange floors, the package calls for:

- Easily identifiable trading cards with pre-printed information that would allow regulators to reconstruct the sequence of a trade, an investigative practice known as following the audit trail.

- Frequent collection, at least every 30 minutes and eventually every 15 minutes, of trading cards to reduce the potential for altering records to conceal illegal trading activity.

- Preventing people with histories of rule violations from serving on the governing boards, disciplinary committees or arbitration panels of exchanges or registered futures associations.

“All of these changes will help detect but also deter” illegal trading, said Gramm after the commission vote.

Pilot Program

The CFTC’s proposed changes do not take effect immediately, but are subject to comment by interested parties for the next 30 to 60 days before the commission can make its approval final.

Put into effect immediately was the Floor Surveillance Task Force, which will be responsible for directly examining trading cards and other trading records right on the exchange floor.

The pilot program will enable the commission to determine its needs for a permanent floor surveillance program.

“We support their efforts to address these issues,” said Andrew A. Yemma, a spokesman for the Chicago Mercantile Exchange. “After a thorough review process earlier this year, our own board of governors approved a comprehensive set of rule enhancements that are very similar to what the CFTC proposed today.”

A spokesman for the Board of Trade was not immediately available for comment late Tuesday.

The markets themselves have proposed tighter trading rules and updated surveillance and auditing techniques to combat abuses.