CHICAGO -- A blue-ribbon panel Wednesday recommended major reforms at the Chicago Mercantile Exchange and the Chicago Board of Trade revised its trading procedures in response to a federal fraud investigation.
FBI agents posing as traders infiltrated the CBOT and CME -- the world's largest futures exchanges -- more than two years ago to investigate allegations of fraudulent dealings by traders.
A 23-member federal grand jury began investigating the matter January 25, the same day the CME board of governors appointed its 10-member Special Committee to Review Trading Practices.
The blue-ribbon committee in its recommendations to the board called for major revisions in rules regarding trading practices, floor-trading surveillance and punishments for rule violations.
The recommendations include a virtual ban on so-called dual trading - a practice under which a dealer carries out trades for himself as well as for clients' accounts. The committee recommended that the CME's trading-floor surveillance staff be doubled and that minimum penalties be established for various violations.
The recommendations were submitted to the board of governors for approval.
'The federal investigation offered the CME an opportunity to cause a comprehensive and substantive review of all its trading rules and procedures. The committee did just that,' said Leo Melamed, chairman of the CME Executive Committee and special counsel to the CME board.
CME Board Chairman John T. Geldermann headed the special committee. Melamed and Susan Phillips, former Commodities Futures Trading Commission chairman and currently vice president for finance at the University of Iowa, served as vice-chairmen of the panel.
'The ultimate goal of these recommendations is the maintenance of the integrity and public confidence in the markets offered by the Chicago Mercantile Exchange,' Geldermann said.
He expressed hope the CME board will act on all the panel's recommendations in 45 to 60 days.
The Chicago Board of Trade, meanwhile, sent a notice to members outlining plans to add a one-minute trading session to the end of each trading day for all futures contracts. The move will allow members to even-up any open positions without trading 'on the curb' -- the practice of trading outside the pit, usually after trading hours.
'On the curb' trading violates exchange rules but is widely used by futures traders when they need to correct a late-session error or even up a position before going home for the day.
The CBOT said it will cut the opening and closing time brackets for all commodities to five-minutes, a fine-tuning of CBOT procedures for surveillance and tracking trades for audit.
To deal with outside-the-pits trading, the CME committee came up with the same solution as the CBOT. It recommended adding a brief settlement trade session after the close of regular floor trading.
The CME panel urged that dual trading be banned on both futures and options in all mature, highly liquid contract months. Such a rule would almost completely bar dual traders from handling public customer orders.
Another recommendation would ban members of a broker group from trading for their personal accounts against orders executed by members of their broker group.
The panel urged the number of trading-floor surveillance personnel be at least doubled from the present four to eight and that non-members be appointed to all major CME disciplinary committees and given full voting privileges on those committees.
It recommended that rules violations be categorized as major or minor and that minimum penalties be established. A major violation would mean a six-month suspension and a second offense would mean expulsion. A minor offense would draw a 30-day suspension for a first offender. A second offense would draw a six-month suspension, a third a one-year suspension and a fourth expulsion.
