CTFC Surveillance of the Silver Market
The Commodity Futures Trading Commission (CFTC) is the United States government agency responsible for the regulation of all US futures markets. The CFTC seeks to safeguard the economic utility of futures markets by encouraging their competitiveness and efficiency, ensuring their integrity and protecting market participants against manipulation, abusive trading practices and fraud.
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.
Information Gathering For Market Surveillance
At the heart of the CFTC 's market surveillance system is its large-trader reporting system. In order to identify potentially disruptive futures positions, the CFTC staff collects and analyses data on large trader positions in all commodities. Each day, staff economists examine computer listings of large trader positions in actively traded markets to identify positions that could pose the threat of manipulation. Reportable positions, futures positions above specified levels set for reporting purposes, are obtained daily from futures commission merchants (FCMs), clearing members and foreign brokers. Exchanges also provide the daily positions that each clearing member is carrying in each future and options contract on each underlying commodity.
Since traders frequently carry futures positions through more than one FCM, and since individuals sometimes control or have a financial interest in more than one account, the CFTC routinely collects information that enables its surveillance staff lo aggregate related accounts. FCMs must file a Form 102, which identifies e ac h new account with reportable positions for each future. In addition, if a trader's position reaches a reportable level, the trader may be required to file a more detailed identification report, a Form 40, to further identify account s and reveal any relationships that may exist with other accounts or traders.
Surveillance economists may further investigate the positions of large trader by instituting a 'special ca ll.' A special call requires a trader to report their futures and option positions with all brokerage firms, or their cash market or OTC positions.
Another element of the market surveillance program is the monitoring of compliance with the CFTC or exchange speculative limit rules. These rules help prevent speculators from accumulating concentrations of contracts of a size sufficient to possibly disrupt a market. Since bona fide hedgers are exempt from speculative limits, the CFTC and the exchanges administer hedge exemption programs that require commercial traders who need futures or options positions in excess of speculative position limits periodically to submit data justifying the exemption level they seek.
Remedial Surveillance Measures
The CFTC has the authority to deal with potential market problems in several different ways. These alternatives range from informal efforts to encourage compliance with the Commodity Exchange Act and the maintenance of orderly markets to formal legal actions to ensure compliance or to prosecute alleged noncompliance.
The CFT C surveillance staff frequently contact traders to determine their intentions regarding their futures trading or positions, to express any concerns the CFTC staff may have regarding such trading or positions and, less frequently, to issue any appropriate warnings, verbally or in writing. Also, the CFTC may make special calls for information from traders, as a means of getting a more complete understanding of the market situation and to be sure the trader knows its activities are being scrutinised.
The CFTC also has statutory tools for addressing violations of the Commodity Exchange Act. These include taking injunctive action to stop ongoing manipulation. The Commodity Exchange Act authorised the CFTC to bring an action in a US District Court to enjoin a person or a contract market from violating the Commodity Exchange Act. The CFTC also has the authority to investigate and, if appropriate, prosecute alleged violations of the Commodity Exchange Act, by traders or by exchanges that have failed to enforce their rules.
The CFTC has emergency powers to intervene when it determines that a serious market threat exists. These emergency powers are contained in Section 8a (9) of the Commodity Exchange Act. In general terms, the CFTC has the power to take necessary action to maintain and to restore orderly trading when there is a threatened manipulation or other major market disturbance that would prevent the market from accurately reflecting the forces of supply and demand for such commodity.
Mr Mielke has over 25 years' experience in the regulation of US commodity markets. After receiving an MA in economics from Michigan State University, he started his career as a surveillance economist in the Chicago office of the Commodity Exchange Authority of the US Department of Agriculture, the predecessor agency of the CFTC.
Since 1978, Mr. Mielke has been the director of the CFTC's Market Surveillance program. As such, he supervises a staff of Surveillance economists who monitor all actively traded markets on a daily basis and statistical support staff who maintain an extensive database regarding these markets.
Mr. Mielke briefs the Commission and senior staff each week on significant market developments and potential problems that may require Commission attention. His staff also prepare special studies of unusual markets events and help prepare responses to Congressional inquiries regarding market performance.