Objectives, Scope, and Methodology

To report on the status of exchange compliance with the existing and heightened standards and CFTC actions to enforce the FTPA audit trail provisions, we reviewed CFTC’s (1) November 1994 report to Congress on audit trails; (2) June 1995 report on the results of exchange audit trail testing; (3) November 3, 1995, letters to four exchanges with agency conclusions related to their good faith efforts to comply with the FTPA; (4) August 1996 report on the status of exchange audit trail compliance and the results of further exchange audit trail testing; (5) other relevant CFTC studies and reports; and (6) the legislative history of the FTPA. On the basis of this and other evidence, CFTC found that 7 of 11 exchanges were in compliance with the 1-minute trade timing and sequencing standards. It also plans to act on exchange petitions for exemption from the dual trading ban beginning in September 1996. The exchanges initially told CFTC that AUDIT would be operational by the October 28, 1995, statutory deadline for implementing the FTPA heightened audit trail standards. In June 1996, the exchanges testified that the FTPA requirement to capture broker receipt time was not currently practicable. Conclusions

CFTC has taken actions to enforce exchange compliance with the FTPA audit trail standards. Further, CFTC has not yet fully addressed the practicability of all the act’s requirements as part of its ongoing effort to enforce the heightened standards. CFTC Recommendations to Futures Exchanges for Improving Their Audit Trails and Exchange Responses

The following are the audit trail improvements that CFTC recommended in June 1995 to the Chicago Board of Trade (CBT), Chicago Mercantile Exchange (CME), Coffee, Sugar & Cocoa Exchange (CSCE), and New York Mercantile Exchange (NYMEX) and the exchanges’ individual responses.
Why GAO Did This Study

Pursuant to a congressional request, GAO provided information on the Commodity Futures Trading Commission's (CFTC) actions to enforce Futures Trading Practices Act (FTPA) audit trail provisions.

What GAO Found

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.