03/01/2005
Although both the NYMEX and COMEX Divisions have had rules in place for several years addressing procedures for rectifying errors, there are still instances where members or their clerks attempt to rectify errors but fail to follow the procedural requirements outlined in the Rules. The defense raised in cases where members have failed to follow error resolution procedures is invariably that the trade could have been submitted under the rules of the division as an error trade with the customer receiving at least as good a fill price. The Business Conduct Committee has accepted a recommendation by Compliance Staff that classes be offered to educate floor brokers and their clerks on acceptable procedures for rectifying errors. Following these classes, the BCC will no longer consider a member's failure to understand the rule and procedures established for rectifying errors as a defense to any rule violation.
The Compliance Department has scheduled two dates to conduct a class on resolutions of errors:
Monday, March 14, 2005 -- 3:00 p.m. Room 1015The applicable rules for each Division are as follows:
Wednesday, March 30, 2005 -- 3:00 p.m. Room 1015
NYMEX Division Rule 6.17, Errors and Omissions in Handling Orders
NYMEX Rule 6.17, Resolution of Errors, Out- and "Who" Trades (A) Errors. If a Floor Member has failed to execute an order placed by a customer or has made an error in handling a customer order, such as by under buying or under selling, and the order cannot be executed in the market at a price which is equal to that which the order should have received, the Floor Member may take one of the following actions:
(1) Execute the order in the market and adjust the customer if the price is worse than that which the customer should have received had the error not occurred; (2) Execute a spread transaction in accordance with Rule 6.17A-Spread Transaction to Rectify an Error; or
(3) Take the opposite side of the order (notwithstanding any rule to the contrary), at a price which is equal to the price the order should have received had the error not occurred. If such price cannot be obtained in the market, or the Floor Member discovers the error after the close of such market, the Floor Member may assign the opposite side of the order to the Floor Member’s designated error account at a price which is equal to the price which the order should have received had the error not occurred, notwithstanding any rule to the contrary. Any assignment made after the close of the market must be made promptly.
In no case may a customer receive a price which is worse than that which the customer should have received had the error not occurred. Any transaction or straddle transaction executed pursuant to Subsection (3) above shall be within such day's trading range, reported to the Compliance Department in accordance with the procedures listed in Section (E) below. (B) Out-Trades.
(1) If two Floor Members who have executed a trade disagree about any of the material terms of the trade, including the quantity, price, option series or contract month, or if one Floor Member fails to acknowledge the trade (collectively referred to as "out-trades"), the trade shall clear in accordance with the seller's recorded terms, unless the Floor Members both agree to nullify ("break") the trade or agree to accept the trade in accordance with the buyer's recorded terms.
(2) If a trade is "broken" in accordance with Subsection (B)(1) after it has been confirmed to a customer, the Floor Member handling the customer order may take the opposite side of the order into the designated error account so that the order can be filled by the terms confirmed, provided that he does so in accordance with the procedures set forth in Section (E) of this rule by the close of trading on the business day following the day on which the trade originally was executed.
(C) "Who" Trades. If a Floor Member has executed a trade for a customer, recorded the terms of the trade on his trading card or Approved Handheld, and confirmed the trade to the customer, but is unable to determine the proper identity of the opposite Floor Member (a "Who" trade), the Floor Member shall either:
(1) re-xecute the trade in the ring, by open outcry, and adjust the customer to the originally confirmed price; or
(2) substitute himself for the unknown opposite Floor Member, take the opposite side of the trade into his designated error account and assign a fill to the customer at the originally confirmed terms, provided that he does so in accordance with the procedures set forth in Section (E) of this rule by the close of trading on the business day following the day on which the trade originally was executed.
(D) Offset. A Floor Member may not establish a position that would offset the position he has acquired pursuant to Subsection (A)(3), or Sections (B) or (C) of this rule until at least ten minutes after the time of execution of the original trade for the customer.
(E) Procedures. A Floor Member may take the opposite side of a customer order to resolve an error, out- or "Who" trade [as defined in Sections (A)(3), (B) and (C) above] in accordance with the following procedures: (1) Within 15 minutes of the resolution of an error, out- or "Who" trade, the Floor Member must prepare or cause to be prepared an Error/Out-rade Correction Slip (hereafter "Slip") that sets forth clearly and accurately:
(a) the date of the error, out- or "Who" trade; (b) the Floor Member's badge number;
(c) the Floor Member's error account number and the clearing firm at which the account is maintained; (d) the badge of the opposite Floor Member, if applicable;
(e) the details of (i) the trade as recorded by the Floor Member, (ii) the trade as recorded by the opposite Floor Member, in the case of an out-trade, (iii) the cross trade by which the Floor Member has taken the opposite side of his customer's order;
(f) the date on which the Slip was prepared;
(g) the signature of the individual who prepared the Slip; and (h) such other information as the Exchange may require. (2) Upon completion of the Slip, the Floor Member shall staple a photocopy of his trading records to the Slip and submit the Slip and trading records to a designated representative of the Exchange, who shall review the materials to assure that they are complete, sign the Slip, and retain one copy for the Exchange.
(3) After the Exchange representative has signed the Slip, the Floor Member shall submit the remaining copies of the Slip as follows:
(a) the top copy shall be submitted to the clearing member at which time the clearing member shall time-stamp the Slip, thereby acknowledging receipt;
(b) the second copy shall be submitted to the clearing member intended to clear the customer's trade; and
(c) the third copy shall be submitted to the opposite Floor Member, in the case of an out-trade.
(4) The Floor Member shall retain a copy of the Slip for such period as required by CFTC Rule 1.31 for trading floor records.
(F) Recordation Requirements. (1) A Floor Member shall not be required to insert on a trading card or an Approved Handheld the cross trade resulting from the resolution of an error, out-or "Who" trade by having taken the opposite side of a customer's order, but any trade offsetting the cross trade must be recorded in conformity with the requirements of Rule 6.90 ("Trading Card Procedures") and, if executed after the cross trade, specially identified in such manner as the Exchange may prescribe.
(2) Trade data submitted to the Exchange shall specially identify any cross trade resulting from a Floor Member’s resolution of an error, out- or “Who” trade and specify the account in which it will clear. Trade data pertaining to the offset of the cross trade shall specify the account in which the offsetting trade will clear.
(F)(3) Any claim made by a Floor Member against another Floor Member in connection with an out–trade shall be recorded on the reverse side of the trading card of each of the Floor Members. If either Floor Member records trades using an Approved Handheld, the Floor Member must either create a written time stamped record or an Electronic notation of the claim.
(G) Adjustments. If the resolution of an out-trade or a dispute involving an error requires a Floor Member to make an adjustment to another Floor Member, or to a customer, the adjustment shall be made by check [or through the use of ATOM with permission of the Floor Member].
(H) Modification of Trade Terms Prohibited. Except as otherwise provided in this rule, a Floor Member shall not change the terms of a trade to correct an error or to resolve an out-trade.
(I) Arbitration. Nothing shall preclude the resolution of a dispute arising from or in connection with an error or out-trade by means of arbitration in accordance with Chapter Five of these rules.
NYMEX Division Rule 6.17A, Spread Transaction to Rectify an Error
(A) In the event that a CTI Type 4 Customer order is executed in the wrong month or at the wrong strike price, the trade shall be referred to as an out-trade. in the event of an out-trade, a Floor Member may use a spread transaction to re-execute the order and liquidate the position created by the out-trade, provided that the Floor Member follows the procedures set forth in Section (B) of this Rule.
(B) By the close of trading on the first business day following the day on which the out-trade was executed:
(1) a properly completed Error Form must be submitted to the Corrections Area;
(2) the error trade, as well as the liquidating trade, must be placed in either the Floor Member's designated error account or personal account; and
(3) the pricing of the re-executed trade shall be consistent with pricing at the time of the initial error.
(C) Any spread transaction executed for the purposes of taking advantage of a customer order shall be a rule violation.
COMEX Division Rule 104.71, Resolution of Errors, Out- and "Who" Trades
(a) Errors. If a floor member has failed to execute an order placed by a customer or has made an error in handling a customer order, such as by under-buying or under-selling and the order cannot be executed in the market at a price which is equal to that which the order should have received, the floor member may take one of the following actions:
(1) Execute the order in the market and adjust the customer if the price is worse than that which the customer should have received had the error not occurred;
(2) Execute a spread transaction in accordance with Rule 104.71A-Spread Transaction to Rectify an Error; or
(3) Take the opposite side of the order (notwithstanding any rule to the contrary), at a price which is equal to the price the order should have received had the error not occurred. If such price cannot be obtained in the market, or the floor member discovers the error after the close of such market, the floor member may assign the opposite side of the order to the floor member's designated error account at a price which is equal to the price which the order should have received had the error not occurred, notwithstanding any rule to the contrary. Any assignment made after the close of the market must be made promptly.
In no case may a customer receive a price which is worse than that which the customer should have received had the error not occurred. Any transaction or straddle transaction executed pursuant to Subsection (3) above shall be within such day’s trading range, reported to the Compliance Department in accordance with the procedures listed in Section (e) below.
(b) Out-Trades.
(1) If two members who have executed a trade disagree about any of the material terms of the trade, including the quantity, price, option series or contract month, or if one member fails to acknowledge the trade (collectively referred to as "out-trades"), the floor members shall either nullify ("break") the trade or agree to accept the trade in accordance with the terms recorded by one of the two floor members on his trading card.
(2) If a trade is "broken" in accordance with Subsection (b)(1) after it has been confirmed to a customer, the floor member handling the customer order may take the opposite side of the order into an account designated as his error account so that the order can be filled by the terms confirmed, provided that he does so in accordance with the procedures set forth in section (e) of this Rule by the close of trading on the business day following the day on which the trade originally was executed.
(c) "Who" Trades. If a floor member has executed a trade for a customer, recorded the terms of the trade on his trading card, and confirmed the trade to the customer, but is unable to determine the proper identity of the opposite floor member (a "who" trade), the floor member shall either:
(1) re-execute the trade in the ring, by open outcry, and adjust the customer to the originally confirmed price; or
(2) substitute himself for the unknown opposite floor member, take the opposite side of the trade into his designated error account and assign a fill to the customer at the originally confirmed terms, provided that he does so in accordance with the procedures set forth in Section (e) of this Rule by the close of trading on the business day following the day on which the trade originally was executed.
(d) Offset. A floor member may not establish a position which would offset the position he has acquired pursuant to Subsection (a)(3) or Sections (b) or (c) of this Rule until at least ten minutes after the time of execution of the original trade for the customer.
(e) Procedures. A floor member may take the opposite side of a customer order to resolve an error, out- or "who" trade (as defined in Sections (a)(3), (b) and (c) above), only in accordance with the following procedures:
(1) Within 15 minutes of the discovery and resolution of an out- or "who" trade, the floor member must prepare or cause to be prepared an Error/Out- Trade Correction Slip (hereafter "Slip") that sets forth clearly and accurately:
(A) the date of the out- or "who" trade;
(B) the floor member’s badge number;
(C) the floor member's error account number and the clearing firm at which the account is maintained;
(D) the badge number of the opposite floor member, if applicable;
(E) the details of (i) the trade as recorded by the floor member, (ii) the trade as recorded by the opposite member, in the case of an out-trade, and (iii) the cross trade by which the floor member has taken the opposite side of his customer's order
(F) the date on which the Slip was prepared;
(G) the signature of the individual who prepared the Slip; and
(H) such other information as the Exchange may require.
(2) Upon completion of the Slip, the floor member shall staple a photocopy of this trading records to the Slip and submit the Slip and trading records to a designated representative of the Exchange, who shall review the materials to assure that they are complete, sign the Slip, and retain one copy for the Exchange.
(3) After the Exchange representative has signed the Slip, the floor member shall submit the remaining copies of the Slip as follows:
(A) The top copy shall be submitted to the clearing member at which time the clearing member shall time-stamp the Slip, thereby acknowledging receipt.
(B) The second copy shall be submitted to the clearing member intended to clear the customer's trade.
(C) The third copy shall be submitted to the opposite floor member, in the case of an out-trade.
(4) The floor member shall retain a copy of the Slip for such period as required by CFTC Rule 1.31 for trading floor records.
(f) Recordation Requirements.
(1) A floor member shall not be required to insert on a trading card the cross trade resulting from his resolution of an out- or "who" trade by his having taken the opposite side of his customer's order, but any trade offsetting the cross trade must be recorded in conformity with the requirements of Rule 104.80 ("Trading Cards") and, if executed after the cross trade, specially identified in such manner as the Exchange may prescribe.
(2) Trade data submitted to the Exchange shall specially identify any cross trade resulting from a floor member's resolution of an error, out- or "who" trade and specify the account in which it will clear. Trade data pertaining to the offset of the cross trade shall specify the account in which the offsetting trade will clear.
(3) Any claim made by a floor member against another floor member in connection with an out-trade shall be recorded on the reverse side of the trading card of each of the floor members.
(g) Adjustments. If the resolution of an out-trade or a dispute involving an error requires a floor member to make an adjustment to another floor member or to a customer, the adjustment shall be made by check.
(h) Modification of Trade Terms Prohibited. Except as otherwise provided in this Rule, a floor member shall not change the terms of a trade to correct an error or to resolve an out-trade.
(i) Arbitration. Nothing shall preclude the resolution of a dispute arising from or in connection with an error or out-trade by means of arbitration in accordance with Chapter Five of these Rules.
COMEX Division Rule 104.71A, Spread Transaction to Rectify an Error
(A) In the event that a CTI Type 4 Customer order is executed in the wrong month or at the wrong strike price, the trade shall be referred to as an out-trade. In the event of an out-trade, a Floor Member may use a spread transaction to re-execute the order and liquidate the position created by the out-trade, provided that the Floor Member follows the procedures set forth in Section (B) of this Rule.
(B) By the close of trading on the first business day following the day on which the out-trade was executed:
(1) a properly completed Error Form must be submitted to the COMEX Trade Processing Room;
(2) the error trade, as well as the liquidating trade, must be placed in either the Floor Member's designated error account or personal account; and
(3) the pricing of the re-executed trade shall be consistent with pricing at the time of the initial error.
(C) Any spread transaction executed for the purposes of taking advantage of a customer order shall be a rule violation.