with Florida, Arizona and Michigan authorities to develop enforcement agenda in a number of specific cases.

During fiscal year 1984, the State/Federal Liaison Unit worked to assist state and other federal officials in gaining a better understanding of the commodities field. Late in the year, the Division prepared for its Third Annual Enforcement Seminar, which was held in Washington, D.C. on October 18 and 19, 1984. Staff members of the State/Federal Liaison Unit participated in the Seminar and met the attendees, who represented 17 states and 3 foreign countries, Canada, Mexico and Hong Kong, to encourage further cooperation between the CFTC and other enforcement authorities. The Unit participated in a training program for state enforcement officials sponsored by NFA and NASAA and made presentations at NASAA's Zone Enforcement Group meetings. The Unit also distributed copies of the "Summary of Administrative Proceedings and Civil Injunctive Actions" to all State Securities Administrators and Attorneys General; reviewed and commented on the draft format of the Commodity Law Violators Bulletin; and continued to assist in the development of NASAA's Model State Commodity Code for off-exchange commodity activity.

The Unit's expertise has been shared with other federal agencies as well as state agencies. The Unit has conducted special training programs for Assistant United States Attorneys and has delivered lectures on commodity fraud at the FBI's Academy in Quantico, Virginia. In preparation for the coordinated enforcement effort launched in August 1984 against a notorious boiler room network, the Unit particpated in a series of six meetings with the Department of Justice. Finally, the Unit's promotion of effective enforcement against commodity violators has reached across national boundaries, as evidenced by meetings held with representatives of the Royal Canadian Mounted Police, aimed at exchange of information and assistance in the commodities area.

1984 SILVER INVESTIGATION COSTS

Mr. WHITTEN. How much time and resources were spent by the enforcement element on the Hunt Silver Case in fiscal year 1984? Ms. PHILLIPS. During fiscal year 1984, Division of Enforcement staff spent 26,293 hours working on the silver investigation. The cost in salaries, benefits and travel was $485,767.77. The Commission also incurred other costs such as transcript fees.

VIOLATIONS CHARGED IN SILVER MANIPULATION CASE

Mr. WHITTEN. How many separate violations were the Hunts charged with?

Ms. PHILLIPS. Count One of the Complaint alleges that Nelson Bunker Hunt, William Herbert Hunt and the other named respondents, acting singly and in concert, attempted to and did manipulate four categories of silver prices: prices of .999 silver bullion in interstate commerce; prices of silver for future delivery on the Commodity Exchange, Inc., prices of silver for future delivery on the Board of Trade of the City of Chicago; and prices of silver for future delivery on the MidAmerica Commodity Exchange. Thus, at a minimum there are four violations by each Respondent alleged in

Count One. The exact number of violations that may be proven will be determined through the litigation process.

COST OF SILVER MANIPULATION CASE

Mr. WHITTEN. Do you have an estimate of how much this case has cost the CFTC?

Ms. PHILLIPS. During fiscal years 1980 through 1984 and fiscal year 1985 through February 16, 1985, the Commission expended approximately $1,628,000.00 to staff the investigation which led to the silver manipulation case. The Commission also incurred other costs such as transcript fees and travel expenses.

PRICE MANIPULATION

Mr. WHITTEN. We note that the Market Surveillance, Analysis and Research Office is set up to partially help prevent threats of price manipulation. Have there been any specific instances where price manipulation threats were thwarted by this Office?

Ms. PHILLIPS. The process of preventing threats of price manipulation starts with the review of proposed contracts and proposals to amend the terms and conditions of existing contracts. Proposed contract terms and conditions are reviewed for conformance with cash market practices, adequacy of deliverable supplies, and, if applicable, assurance that cash settlement prices are not subject to manipulation. In recent years, the review process of the Commission's staff has identified several cases on which proposed futures contracts or rule changes could have had disruptive market effects if approved by the Commission and implemented by the exchanges in the form originally submitted. For example, proposed contracts submitted by some exchanges for non-government debt instruments included provisions for physical delivery which would have made the contracts very susceptible to manipulation or price distortion. These proposed contracts were subsequently revised to include cash settlement procedures which were approved by the Commission. Another exchange submitted a proposed grain contract which would have required delivery by warehouse receipts at warehouses located at export points. The Commission's staff learned that such grain warehouses would be reluctant to issue warehouse receipts since their main business is loading ocean-going vessels. This contract was eventually approved by the Commission after the rules were changed to provide for delivery by shipping certificates, which are suited to the through-put nature of those warehouses. Proposed energy contracts submitted by exchanges also in some cases have included delivery specifications which would have greatly limited the ability of shorts to make delivery on the contracts. Revisions to the contract terms and conditions were obtained prior to Commission approval to correct these deficiencies.

MARKET SURVEILLANCE ACTIVITIES

Mr. WHITTEN. On page 35 of the explanatory notes you state that although there were a number of potentially serious situations that developed, the Market Surveillance staff prevented any major market disturbance. What potential serious situations were there?

Mr. PHILLIPS. The Commission's Market Surveillance staff is constantly vigilant for any developing market situations that could indicate a potential for price manipulation or some other major market disturbance. Each Friday morning the staff briefs the Commission about several markets that bear watching so the Commission is prepared to step in quickly if and when some form of direct involvement is required. Over the past year, there were about 20 contract liquidations that required particularly close attention. The liquidations that presented the greatest threat of manipulation involved May 1984 wheat on the CBT; May 1984, July 1984 and March 1985 frozen pork bellies on the CME; May 1984 and September 1984 corn on the CBT; September 1984 frozen concentrated orange juice on the NYCE; and February 1985 hogs on the CME. While time does not permit me to discuss each of these potential market problems and the steps we took to prevent a disorderly market, there were some common elements to most of these contract liquidations. Usually there were several traders with large long positions that constituted an unusually large and increasing share of the open interest as the contract approached its final trading day. Those long positions also were substantially in excess of the deliverable supplies (not already owned by those longs), and we were concerned whether additional supplies would be forthcoming in any significant quantities. Therefore, the orderliness of the liquidation of these markets was dependent on the behavior of the dominant longs. To assure that these longs did not exert their market power to disrupt the market and distort prices, our staff, working closely with exchange officials, made the traders aware of our concerns, determined the traders' intentions, and encouraged an orderly liquidation of positions. When extra encouragement appeared warranted, the Commission instructed the officers of the exchange involved to take whatever steps were required to assure an orderly market. In some instances, I was in daily contact with an exchange president sharing information and coordinating our preventive actions. These surveillance efforts were successful, and no market emergency actions by the Commission were required this past year.

MODERNIZATION OF MARKET SURVEILLANCE SYSTEMS

Mr. WHITTEN. What modernization of ADP systems has occurred for market surveillance?

Ms. PHILLIPS. The systems which support the Commission's Market Surveillance function have undergone considerable change. The changes have been achieved gradually without interfering with production of daily outputs for surveillance staff. The first changes in FY 1982 were to upgrade programmer interaction to allow online program modification rather than punched card changes. This capability significantly decreased the time required to make program and table changes such as adding new contracts or speculative limits and test new features. Next, in FY 1983 the largest volume types of data for surveillance were required to be submitted in machine-readable form, decreasing the human error factor in data accuracy and speeding processing.

In FY 1984 the systems were moved from an archaic, operatordependent environment to modern job control-language-driven

processing streams. Statisticians and economists have been trained in the use of the Statistical Analysis System and have full access to surveillance data through that package. This required replacement of machine-dependent bit strings with standard data representation now on a single machine, the AS-5000, rather than the three separate computers it was on in FY 1983.

Within the past year new on-line screen processing programs and report selection facilities have been developed to allow surveillance staff to directly request and receive surveillance-related data. Communication lines and modern 3270-type terminals have been installed to make use of the new software capabilities.

A design concept incorporating a relational database management system has been prepared and core facilities for that design have been completed. Other subsystems are currently under development. This design allows integrated access to both the new database files and information still maintained in SAS files. Acquisition of the database software in FY 1985 was necessary to start implementation of this design.

From no direct access to data by market surveillance personnel in 1982, we have now gone to a mixture of online interactively-updated files, user menus for report selection and large numbercrunching batch jobs; from no user-connected terminals to fourteen terminals in the hands of market surveillance staff in New York, Chicago, Washington and Kansas City.

LARGE HEDGERS STUDY

Mr. WHITTEN. During 1984, the Commission completed a congressionally mandated two-year study of activities of large hedgers in livestock futures. Would you give us a short synopsis of that study? Ms. PHILLIPS. I will provide a summary for the record.

[The information follows:]

Uses of Livestock Futures Markets by Large Hedgers Summary

A n interim report of large hedgers' activities in livestock futures markets during early 1983 was included in the 1983 Annual Report of the CFTC. The futures contracts considered in this study are live cattle, live hogs, and pork bellies. The complete two-year study is included as an Addendum under separate cover to this report. The final study's first section measures the extent of large commercial participation in livestock futures markets, examines the size of the largest commercial positions, and compares them to large speculative positions. Comparable data for selected grain futures markets are examined to provide comparisons between the newer livestock markets and the longer-established grain markets in terms of the market shares and absolute position sizes of large hedgers' futures positions.

Staff economists collected 18 months of data from 12 selected large livestock hedgers. Data included the cash and related futures positions for the large traders in each of seven categories of cash livestock businesses. Surveillance staff interviewed the executives responsible for futures trading of each of the large hedgers in order to learn how, when, and why they used livestock futures in relation to their their cash businesses. These commercial traders were also asked policy questions including what restrictions, if any, are placed on personal trading by employees.

Finally, the study assessed the impact of the largest hedgers on futures markets by reviewing their trading activities and positions in expiring livestock futures contracts. Conclusions were drawn as to whether or not, judging by the activities and positions of these large livestock hedgers, they may have caused price distortion or market disruption.

Both the CFTC and the CME have extensive market surveillance programs designed to prevent the disruption of futures markets by large traders-whether hedgers or

Editor's Note: The full text of this study has been published as an addendum to this Annual Report, in limited quantities.

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