INTL FCStone settled a disciplinary action brought by the New York Mercantile Exchange for allegedly not liquidating a customer’s March 2016 RBOB Gasoline futures contract prior to the expiration of the contract’s trading on February 29, 2016. Under relevant NYMEX rule (click here to access NYMEX Rule 716), INTL FCStone should have assessed whether its customer had the ability to take delivery prior to the contract’s expiration, and when it determined it did not, it should have liquidated its position “in an orderly manner” before the final time of trading, said the NYMEX business conduct committee. FCStone agreed to pay a fine of US $15,000 to resolve this matter. Separately, BGC Radix Energy LP agreed to pay a fine of US $20,000 to resolve charges brought by NYMEX that, solely as a broker, it executed exchange for related position transactions on August 27, 2014, that did not involve the transfer of a related position (BGC was not a principal to the EFRPs; it executed the relevant EFRPs for principals). Bona fide EFRPs must involve transfers of related positions or a binding contract between the parties in accordance with relevant market practices. In addition, JPMorgan Chase Bank NA agreed to pay a fine of US $30,000 also to resolve charges brought by NYMEX related to alleged non-bona fide EFRPs. According to NYMEX, on January 8, 2015, JPMorgan entered into an EFRP where the related position “appears to have been offset in a manner designed to avoid material market risk.” The NYMEX BCC said this was a prohibited transitory EFRP. Finally, Yingdi Liu settled disciplinary actions brought both by NYMEX and the Commodity Exchange, Inc. for allegedly engaging in disruptive trading practices. The exchanges alleged that on multiple days in April 2015 Mr. Liu layered orders on one side of the market in order to induce traders to trade opposite smaller orders he had resting on the other side of the market. Mr. Liu agreed to pay the CME Group exchanges US $35,000 to resolve their charges, and not to trade on any CME Group exchange for 20 business days.
Compliance Weeds: On CME Group, FCMs may only permit customers capable of making or taking delivery from carrying positions prior to a futures contract expiration that entails a delivery obligation. FCMs are affirmatively obligated to confirm that each customer can fulfill its delivery obligations (either making or taking delivery), and if not, are required to liquidate the customer’s position in an orderly manner prior to contract expiration. This concept of an orderly liquidation is also associated with the concept of bona fide hedging – although the obligation is that of the hedging entity, not an FCM. Under the definition of bona fide hedging transaction under applicable law, no positions may qualify as bona fide hedge positions (and thus potentially available for an exemption from position limits) unless the positions are maintained (1) to offset price risks derived from commercial cash or spot operations and (2) such positions “liquidated in an orderly manner in accordance with sound commercial practices” (Click here to access the relevant provision of the Commodity Exchange Act, Sec. 1.3(z)(1).)