The document outlines the definitions and objectives of market surveillance related to commodity trading, focusing on the identification and prevention of manipulation that leads to artificial prices. It discusses the roles of various parties, including exchanges and the CFTC, in monitoring trading activities and enforcing compliance with market rules. Additionally, it highlights the indicators of market manipulation susceptibility and describes emergency actions that can be taken by authorities to maintain market integrity.

1. Christa Lachenmayr, Division of Market Oversight
Kevin Piccoli, Office of International Affairs
Tracey Wingate, Office of International Affairs
December 2017
Oversight of Trading & Post-Trading
U.S. COMMODITY FUTURES TRADING COMMISSION
OFFICE OF INTERNATIONAL AFFAIRS

2. Definitions
• Artificial price – a price that does not reflect the legitimate
market or economic forces of supply and demand
• Manipulation – any market behavior that causes or results in
an artificial price whether intentionally or recklessly. Not
defined in law but is loosely regarded as the exercise of market
power to affect price to an “uneconomic” level.
• Corner – control or domination of both the long side of the futures
market and the available supply of the cash commodity, providing
little choice to those who need the commodity, influencing cash or
futures prices.
• Squeeze – dominant long futures position, exceeding in size the
amount of the cash commodity available to shorts, which forces the
short position holders to cover their positions at higher prices.
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3. MarketSurveillanceObjectives
• Objectives
• Ex ante
• seek out adverse situations as they are developing, before the market
can be disrupted
• identify specific threats of manipulation
• initiate appropriate preventive actions
• During – detect manipulative behavior and contain it
• Ex post – Refer to Enforcement
• Analysis
• Understand market for underlying commodity
• Assess related contracts
• Identify owners, monitor trader activity
• Enforce position limits and exemptions
• Track all large positions that could pose a threat of market
manipulation
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4. MarketSurveillanceApproach
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• CP2: Board of trade shall establish, monitor, and
enforce compliance with the rules of the contract
market…[and] shall have the capacity to detect,
investigate and apply appropriate sanctions to any
person that violates any rule of the contract market.”
• Exchange enforces exchange rules – monitors market participants,
examines futures and cash markets daily
• CFTC enforces CFTC regulations – monitors large traders’ activities,
examines key price relationships
• FCM – monitors execution for compliance with exchange and CFTC rules
and position limits
• Customer or Trader – reports suspicious activity to exchange and/or CFTC

5. MarketSurveillanceActivities
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• Monitors markets to detect and deter manipulation
• market data (confidential or protected)
• large trader reporting – end-of-day positions, concentration of positions (market
power), limits and exemptions, trader identification information
• transaction reporting – volume, liquidity, account identification
• deliveries and deliverable supply
• clearing-member data
• order book data (upon request)
• other market information (public) on price movements and changes in
price relationships, volume, open interest
• Weekly surveillance meetings/briefings
• Interactions with market participants on surveillance issues
• phone calls/emails to traders and exchanges
• warning letters
• emergency actions
• referrals to Division of Enforcement

6. MarketSurveillanceActivities
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• Understand underlying market
• Understand trading behavior
• Monitor trader activity
• Analyze market composition
• Examine large positions that could pose a
threat of market manipulation
• Identify owners
• Enforce speculative position limits

7. Physical Delivery
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• Susceptibility to manipulation occurs when the deliverable supply is small
relative to the size of large positions as the contract approaches expiration
• The more difficult and costly it is to augment deliverable supplies within
the time constraints of the expiring futures contract's delivery terms, the
more susceptible to manipulation the contract becomes.
• Questions to ascertain susceptibility to manipulation
• Are the positions held by the largest long trader(s) greater in size than
deliverable supplies not already owned by such trader(s)?
• Are the long traders likely to demand delivery? Is delivery their least
costly means of acquiring the commodity?
• To what extent are the largest short traders capable of making delivery?
• To what extent are shorts willing to make futures delivery? Is futures
delivery their best market?
• Does the futures price, as the contract approaches expiration, reflect the
cash market value of the deliverable commodity?
• Is the price spread between the expiring future and the next delivery
month reflective of underlying supply and demand conditions in the cash
market?

8. CashSettlement
• Integrity of the price series/index
• Monitor size of futures positions vis-à-vis equivalent in the cash
market
• Is the futures price consistent with supply and demand factors?
• How is the settlement cash price series behaving compared to similar cash
prices?
• Are the largest futures traders engaged in cash trades that affect the
settlement cash price? That is, do the futures traders have an incentive to
engage in losing cash trades in order to benefit a large futures position?
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9. EmergencyActions
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• CFTC or Exchange
• there are statutory provisions under which CFTC can invoke and
exchanges must have rules in place about the authority to use an
emergency action
• types
• margin increase
• required liquidation of positions
• extending the delivery period
• temporarily closing a market
• Exchanges can make hedge exemptions contingent upon
acceptance of these types of actions in non-emergency
situations
• Exchanges and the Commission view market participation as a
privilege not a right – subject to good governance procedures