CTFC Surveillance of the Silver Market

The CFTC 's market surveillance program extends to all participants in US future s markets. Occasionally, the inquiries of the CFTC surveillance staff may extend to markets in other countries. Where markets outside the US have contract delivery terms- particularly delivery points- that significantly overlap with the term s of US futures contracts, forces affecting those markets may also affect futures and cash markets in the US. Although silver trading conducted under the rules of the London Bullion Market Association docs not have common delivery vaults with tl1e Comex silver futures market in New York, there is a substantial overlap in approved brands, and the time and cost of moving silver between the two markets is small in relation to silver's value.

Thus, for markets like copper and silver, a price manipulation effected in London could significantly affect the cash and futures markets for those commodities in the US. Moreover, the potential exists for a trader or group of traders to use both US and London markets to execute a potentially manipulative scheme. Since the Commodity Exchange Act prohibits the manipulation of ". . . the market price of any commodity, in interstate commerce, or for futures delivery on or subject to the rules of any contract market. . ." (emphasis added), the CFTC has a regulatory interest in such market situations.

On occasion, and generally, in response to the emergence of unusual price movements, price relationships, extraordinarily large trader concentrations in US futures markets or a credible market rumour, the CFTC surveillance staff may find it appropriate to inquire about participates in the corresponding London market. Staff make these inquiries in consultation with the regulatory authorities in the UK. We likely also will request information from US firms that are active in the London market. Information obtained through these inquiries will be shared, as appropriate, with UK authorities, particularly in the information indicates a potential market threat.

In recent years, the CFTC has had an excellent relationship with UK regulators. Following a meeting in May 1995 in Windsor, England, convened by the CFTC and the Securities and Investments Board, our two organisations were among the following signatories on 15 March 1996 of the Declaration on Co-operation and Super­vision of International Futures Exchanges and Clearing Organizations and of sub­sequent international efforts to define best practices in information sharing, market surveillance and other regulatory issues.

Market Surveillance Practices And Procedures

The goal of market surveillance is to spot adverse situations in futures markets and to pursue appropriate preventative actions, in co-ordination witl1 the involved exchange, to amid disruption or manipulation of those markets. The CFTC and the exchanges concentrate their market surveillance analyses most heavily on contracts that are expiring because it is during contract expirations that the markets are most vulnerable to manipulation through abuse of the delivery process. The delivery mechanism is intended to lead to, and normally results in, a convergence of cash and futures prices at expiration. However, if a trader attains a market-dominant position, he or she may be able to control the delivery process, dictate the terms of liquidating trades and cause a divergence of futures and cash prices, as well as other price aberrations. The CFTC is alerted to possible disruption through its day-to ­ day analysis of prices, position s and supply/ demand data.

Potential problems are reviewed immediately by the surveillance staff and are discussed

With the Commissioners and senior staff at weekly surveillance briefings or more often, as needed. These briefings keep those individuals abreast of potential problems and significant market development s so they will be prepared to take prompt action when necessary.

When the potential exists for market disruption or manipulation, CFTC 's market surveillance team makes verbal contracts with the brokers or traders who are significant participant s in the market in question. These contacts maybe for the purpose of asking questions, confirming reported positions, alerting the brokers or traders as to CFTC's concern for the situation or warning them to conduct their trading responsibly. These contacts effectively resolve many potential problems at an early stage.

Since market surveillance is not conducted exclusively by the CFTC if a problem develops it is usually handled jointly by the CFTC and the affected exchange. Relevant surveillance information is shared and when appropriate, corrective action s arc co-ordinated. The C FTC customarily gives the exchange the first opportunity to resolve the problem itself, either informally or through emergency action. If an exchange fails to take actions that the CFTC deem s appropriate, the CFTC has emergency powers under which it can order the exchange to take actions specified by the CTFC. The CFTC has rarely needed to use its emergency powers.