Chicago Mercantile Exchange Group exchanges and ICE Futures U.S. brought and, in all but one case, voluntary settled 19 disciplinary actions charging a myriad of alleged rule violations—from improper exchange for related position transactions, forbidden pre-hedging of block trades, a position limit violation, wash sales and various other trade practice violations.
The Chicago Mercantile Exchange charged five firms with engaging in so-called “transitory” exchange for related position transactions involving foreign exchange products. CME claimed that none of the firms’ transactions included documentation of the corresponding cash positions and thus were not “bona fide.” The firms included three non-CME member firms—FTC Capital, GMBH, Jamison Capital Partners LP, and TMS Capital Ltd.—and two member firms—Macquarie Equities Ltd. and Newedge USA, LLC. Newedge and TMS were each subject to two disciplinary actions. Fines for the seven disciplinary actions—which were all voluntarily settled—ranged from US $7,500 to US $60,000.
Similarly, the New York Mercantile Exchange charged four firms with engaging in EFRP transactions without a transfer of ownership of the cash commodity underlying the exchange contract, a related product or an over-the-counter instrument. Because there was no such transfer, the EFRP transactions were not “bona-fide” said NYMEX. All four firms—GDF Suez Trading, MCE Ltd, Petco Trading Labuan Co. Ltd., and Sinopec (Hong Kong) Petroleum Company Limited, were non-members. To resolve these matters, the firms agreed to pay fines from US $15,000 to US $30,000.
Two firms—NIC Holding Corp., a NYMEX member firm, and Standard Americas Inc., a Commodity Exchange, Inc. non-member—were charged by CME Group exchanges with pre-hedging block trades after receiving solicitations for such trades, but before consummation. As a result, claimed the exchanges, the firms were able to lock in profits. To resolve these matters, each firm agreed to disgorge its profit on the relevant transactions and pay a separate fine. NIC consented to pay a fine of US $75,000 and disgorge profits of $114,060, while Standard Americas agreed to pay a fine US $65,320 and disgorge profits of US $175,000.
Separately BTG Pactual Commodities (US) LLC, a NYMEX non-member, agreed to pay a fine of US $15,000 and disgorge profits of almost $65,000 to resolve NYMEX charges related to its alleged violation of a spot month position limit for a limited period on one day. Three COMEX non-members agreed to pay an aggregate fine of US $70,000 for engaging in a series of wash trades on two days in 2014 between accounts with the same beneficial owner. The non-members were Li Ji Liang, Guanchao Pang and Wellca International Trading Limited.
Fusion Asset Management LLP resolved charges brought by ICE Futures U.S. that its employees traded funds they managed opposite each other allegedly to move positions from one fund to another without using the exchange’s crossing functionality. IFUS acknowledged that “[n]o harm to any customer was…alleged [o]r proven.” Fusion agreed to pay a fine of US $50,000 to resolve this matter.
Finally, an IFUS hearing panel entered a default judgment against Jude Sullivan. The exchange claimed that Mr. Sullivan, Mark Porter and Kevin Wicinski, all former floor brokers, may have violated exchange rules when Mr. Sullivan, between March and July 2011, withheld customer orders and engaged in several non-competitive transactions opposite Mr. Porter and Mr. Wicinski at favorable prices to them. The panel ordered Mr. Sullivan to pay restitution to the harmed customers of almost US $46,000 and banned him from trading IFUS products for two years. Mr. Wicinski and Mr. Sullivan agreed to resolve charges against them for IFUS trading bans of eight months and 12 months, respectively.
A transitory exchange for related position is one where the execution of the EFRP is contingent—either by express agreement or otherwise—upon the execution of another EFRP or related position transaction, and where the combined transactions result in the offset of the related position without the parties incurring market risk. Prior to August 4, 2014, most transitory EFRPs on all CME Group exchanges were prohibited. However, there were exceptions for EFRPs involving foreign currency, metals and energy products. Beginning August 4, 2014, transitory EFPRs involving these products also were prohibited. However, “immediately offsetting” exchange for physical transactions (a type of EFRP transaction) were authorized for foreign currency, but:
the Exchange would expect to see confirmation statements issued by the bank/foreign exchange dealer party to the Transaction. These confirmation statements should be the type normally produced by the bank/foreign exchange dealer for confirmation of currency deals and should indicate, by name, the identity of the counter party principal to the Transaction.
CME Group explained that, immediately offsetting EFP transactions were not transitory because,
the offsetting physical transaction is not contingent on the EFP in any way. If, for example, the futures leg of an immediately offsetting EFP in foreign currency is not accepted for clearing, the futures transaction is void ab initio and the counterparties would be left with the stand-alone physical transaction.
(Click here for relevant CME Group advisory notice regarding EFRPs, including “immediately offsetting” EFPs. This MRAN includes CME Group Rule 538K.)
IFUS also permits immediately offsetting EFP transactions in foreign currency futures. (Click here for relevant IFUS FAQs regarding such transactions.)
Immediately offsetting EFPs are only available for foreign currency products on CME Group and IFUS.
Practically speaking, immediately offsetting EFP transactions involving foreign currency products achieve the same result as what were formerly transitory EFP transactions. However, documentation requirements are likely more complex for some traders, particularly involving managed accounts. (Click here to access a related article, “Lord Voldemort Hovers Over the Futures Industry: CME Prohibits All Transitory Exchange of Futures for Related Positions by Name” in the April 14, 2014 edition of Between Bridges.)
It is critical for parties always to ensure there is proof and/or relevant documents to support the related position component of any EFRP no matter what product. Relevant documents must be saved for at least five years.
Once a party is solicited for a block trade, it cannot disclose the details of the solicitation to any other party except to facilitate the execution of the block trade. This ban is in effect until a public report of the block trade is made by the exchange.
Moreover, pre-hedging, anticipatory hedging or trading ahead of any portion of a block trade in the same product or a closely related product is prohibited following solicitation to participate in such transaction. Counterparties to the block trade, however, may initiate trades to hedge or offset the risk of a block trade as soon as they execute the trade, even before the public report of the trade by the exchange. A closely related product is one that is highly correlated, serves as a substitute for, or is the economic equivalent of the product subject to the block transaction.