Risk Desk Editor Examines "Strict Liability" Rules of the CME

In the latest installment of "Drums along the Potomac," Risk Desk editor John Sodergreen examined the requirements for "strict liability" under Chicago Mercantile Exchange Rule 433. Rule 433 imposes liability on a firm for the misdeeds of its agents.

Mr. Sodergreen noted that:

• CME Rule 433 and Market Regulation Advisory Notice RA1517-5 could make trading firms "strictly liable for failing to supervise manipulative or disruptive trading activity generated by automated trading systems . . . that they employ"; and

• the "strict liability" provision "parallels [CEA Section 2], which imposes liability upon principals for the acts of agents, and which has long been interpreted as a strict liability provision."

He stated that trading firms should (i) "implement effective pre-trade risk controls and software change management programs that are in line with the FIA's recommended best practices," and (ii) "utilize a modern trade surveillance system that enables compliance staff to efficiently identify potential manipulative trading activity."