Oral Valentin, Jr., a former Commodity Futures Trading Commission-registered floor broker, agreed to pay a fine of US $35,000 and serve a 10-day CME Group trading suspension to resolve a disciplinary action brought by the Chicago Mercantile Exchange for allegedly receiving nonpublic information about a pending customer order for a Eurodollar options spread from a currently registered floor broker, and arranging and later executing his own order against the broker’s customer order. The CME claimed this transaction, which occurred on March 13, 2015, was a prohibited pre-negotiated and noncompetitive transaction. The floor broker, Mark Donahue, a CME member, also settled a corresponding disciplinary action by agreeing to pay a fine of US $20,000 and serving a 15-day trading suspension. Mr. Valentin, who is not a CME member, was recently registered as a floor broker from May 30, 2012 through June 11, 2013. Separately, Saxo Bank A/S, a member firm, agreed to pay an aggregate fine of US $190,000 to the Chicago Board of Trade and the Chicago Mercantile Exchange to resolve two disciplinary actions against it for the way it liquidated futures positions of its customers that were under-margined. According to the exchanges, on multiple dates between October 2014 and March 2015, Saxo employed a liquidation algorithm that automatically entered market orders for the entire amount of an under-margined customer’s positions. The exchanges said it did so without considering market conditions. As a result, on at least three occasions on the CBOT and two occasions on the CME, the liquidation caused “significant price movements.” CME Group said that the liquidations were a violation of its prohibition against entering actionable messages “with intent to disrupt, or with reckless disregard for the adverse impact on, the orderly conduct of trading or the fair execution of transactions.” (Click here for background in a special edition of Between Bridges dated March 20, 2o17, including My View.)

Compliance Weeds: Generally, for approved Globex-traded contracts, CME Group permits pre-execution communications to facilitate trading subject to strict requirements. (Pre-execution communications are never permitted in connection with open outcry transactions with the sole exception of CME options on S&P futures undertaken in accordance with large order execution rules.) These requirements include that the party on whose behalf a communication is being made previously must have consented to such communication and that no person involved in pre-trade communications may take advantage of information conveyed except to facilitate the relevant trade. Unfortunately, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps for executing a cross trade following a conversation varies. There are Globex Crosses, Agency Crosses, Committed Crosses, and RFQ and RFC Crosses too. However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. Fortunately, hidden in the middle of the relevant Market Regulation Advisory Notice related to pre-execution communications is a link to a very helpful matrix of eligible products and associated crossing protocols (click here to access). (Click here for further background in the article “CME Group Updates Its Pre-Execution Communication Rule to Reflect New Committed Crosses” in the January 31, 2016 edition of Bridging the Week.)