Futures Markets

Heightened Audit Trail Standards Not Met But Progress Continues Gao ID: GGD-96-177 September 25, 1996

In 1989, the Justice Department, along with the Commodity Future Trading Commission (CFTC), conducted an undercover investigation at the Chicago Board of Trade and the Chicago Mercantile Exchange. The investigation revealed illegal trading practices designed to enrich participants. In a report that year to Congress (GAO/GGD-89-120), GAO concluded that most of the illegal practices uncovered could have been detected with improved audit trails--the physical records of the price and time of each trade. Congress incorporated the then existing audit trail standards, as well as heightened standards, in the Futures Trading Practices Act of 1992. The act required that CFTC report to Congress within two years on the progress that U.S. futures exchanges had made in meeting the audit trail standards and include recommendations on the appropriateness of extending the October 1995 deadline for meeting the standards or for modifying them. This report discusses the status of exchange compliance with the existing and heightened standards as well as CFTC actions to enforce the act's audit trail provisions.

GAO found that: (1) 7 U.S. futures exchanges are in compliance with FTPA 1-minute trade timing and sequencing standards; (2) CFTC is unable to determine the status of four other exchanges until it reviews the results of the audit trail tests; (3) audit trail test results for the Chicago Board of Trade (CBT) and the Chicago Mercantile Exchange (CME) are not precise enough to verify their compliance with existing audit trail standards; (4) none of the exchanges fully complied with the heightened audit trail standards as of October 28, 1995; (5) CFTC has delayed requiring some audit trail enhancements to existing systems due to assurances that electronic trading terminals would be in place by the statutory deadline; (6) CFTC has granted the Coffee, Sugar & Cocoa Exchange and the New York Mercantile Exchange temporary relief from the FTPA statutory deadline; (7) CBT and CME were not in compliance with the heightened FTPA guidelines after additional retests; (8) CFTC has not determined the practicability of certain FTPA provisions, including the requirement to capture broker receipt time for customer orders; (9) CFTC plans to act on exchange petitions for exemption from the dual trading ban; and (10) CFTC needs to keep Congress informed of its actions to facilitate additional FTPA audit standards.

Recommendations

Our recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.

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