By Tom Polansek
CHICAGO, Aug 2 (Reuters) - CME Group Inc should
improve the way it polices its Chicago exchanges to ensure that
traders are not using certain types of trades to disguise rule
breaking, U.S. regulators said in a report released on Friday.
Commodity Futures Trading Commission staff said the exchange
operator should make "significant and prompt" upgrades to its
procedures and consider adding more staff to police markets.
The CFTC staff also expressed concerns about the low number
of investigations CME launched regarding trades known as
Exchange for Related Position transactions, or EFRPs.
CME staff reviewed market surveillance procedures at CME's
Chicago Mercantile Exchange and Chicago Board of Trade from Nov.
1, 2010 to Oct. 31, 2011. During that period CME opened only 16
EFRP cases when nearly half a million transactions took place,
according to CFTC.
Traders use EFRP to exchange an over-the-counter swap or a
cash position into an equivalent futures contract. The exchange
takes place away from the public marketplace and is reported to
CME or CBOT once complete. Regulators want to make sure traders
do not use the transactions to hide otherwise prohibited
"The one thing that really did jump out at me is the focus
on EFRPs and the verbal spanking that CFTC delivered on that
issue," said Craig Pirrong, a finance professor at the
University of Houston.
CFTC and other regulators have been stepping up their market
policing recently. In early 2012 the CFTC fined Morgan Stanley
$5 million for misusing EFRPs at the CME and CBOT, causing
fictitious trades in futures tied to interest rates from 2008 to
CME needs to "ensure that the factors and procedures it uses
to identify EFRPs that warrant the opening of case files are
adequately targeting problematic EFRPs," CFTC said. The
commission said it provided specific guidance to CME relating to
the establishment of an adequate program.
CME, in a statement, said it was committed to ensuring fair,
well-regulated markets and had already implemented many of
CME should continue to monitor trading volume levels and new
product launches to determine whether it needs to add staff
members "to fulfill the exchanges' self-regulatory
responsibilities related to market surveillance," according to
"Adequate staffing of compliance responsibilities at the
four CME Group exchanges is of particular concern because of the
substantial share of the entire U.S. futures and options
marketplace accounted for by the CME Group exchanges," CFTC
During the review period and following a previous CFTC
review in 2010, CME increased its market surveillance staff to
45 people, 25 of whom were primarily dedicated to CME and CBOT,
from 40 people, 22 of whom were primarily dedicated to CME and
CBOT, according to CFTC.