CME Group brought and settled multiple disciplinary matters alleging violations of its rules related to exchange for related positions transactions, as well as for purported market disruption activity. In most of the cases alleging illicit EFRPs, CME Group claimed there was no transfer of ownership of the cash commodity associated with the exchange contract or a byproduct, related product or related over-the-counter product, as required by CME Group rule. (Click here to access CME Group Rule 538C.) Four firms, all CME Group non-members, settled these EFRP actions for fines ranging from US $15,000 (for one allegedly problematic transaction) to US $25,000 (for multiple allegedly problematic transactions). In addition, one non-member firm agreed to settle a disciplinary action for US $20,000 where CME Group alleged that it entered into an EFRP when the related position “was offset in a manner designed to avoid material market risk.” CME Group claimed this transaction was an impermissible contingent EFRP. Finally, three individuals agreed to sanctions and trading suspensions or prohibitions for allegedly entering orders without the intent to trade. Two of the individuals, Heet Khara and Nasim Salim, were recently the subject of an enforcement action by the Commodity Futures Trading Commission for overlapping conduct. They each recently settled their CFTC charges by agreeing to pay fines in excess of US $1 million apiece and permanent trading prohibitions. (Click here for details regarding this CFTC action and settlement in the article, “Two Non-US Residents Consent to CFTC Settlement for Alleged Spoofing Activity” in the April 10, 2016 edition of Bridging the Week.) The third individual, David Kotz, was charged with, on multiple occasions from June 2013 through June 2014, placing orders on one side of the market to obtain fills on the opposite side. Once he obtained the fills, he cancelled the resting orders within approximately one second. Mr. Kotz settled his disciplinary action by agreeing to pay a fine of US $200,000 and serving a suspension from trading any CME Group product for 15 business days.
Compliance Weeds: Exchange for related positions transactions and block trades are subject to strict rules governing the lawful parties to such transactions, how such transactions must be executed and documented, and by when and how such transactions must be reported. Traders must regularly be reminded of these rules and follow them meticulously. Violations of relevant exchange rules render the transactions non-bona fide and may constitute unlawful non-competitive trades under applicable rules of the Commodity Futures Trading Commission. (Click here for a somewhat dated overview of the requirements for EFRPs in the article “Alphabet Soup Under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs (EFPs, EFRs, and EOOs) Suggest Tougher Times for Traders and FCMs – Time to Be Pro-active” in the August 6, 2013 edition of Between Bridges. Click here for more recent articles in block trades and EFRPs in the category “Block Trades and EFRPs” on the Bridging the Week website.)