Richard Larkin, a nonmember, agreed to pay sanctions in excess of US $300,000 to resolve disciplinary charges brought by the New York Mercantile Exchange that he facilitated exchange for related position transactions for a customer that the customer never authorized, and that included unauthorized mark-ups on the customer’s futures positions.

Mr. Larkin’s alleged infraction occurred on “numerous occasions” between April 27, 2010, and August 20, 2014, and involved a company Mr. Larkin owned, Hedge Solutions Inc., that took the customer’s order, and an affiliated company, Northland Energy Trading LLC (NET), that engaged in the EFRPs opposite the customer. According to CME Group, “upon receiving the customer’s order Larkin (or other NET employees) would establish a futures position for NET on the same side of the market as the customer order and then offset that position through an EFRP between NET and the customer, at a price that included a mark-up over the price of the original futures position.”

Mr. Larkin agreed to pay a fine of US $145,000 and disgorgement of US $155,799, and to serve a 15-day suspension from trading CME Group products to resolve this matter.

Separately,

  • Toji Trading Group, a member firm, resolved charges that on multiple dates between July 2012 and March 2013 trades for the firm involving Ten Year T-Note options on futures frequently self-matched because the firm’s automated trading system had “configuration errors and malfunctions.” In some instances, said CME Group, the self-matched trades “comprised 100 percent of the individual strikes’ market volume.” Toji Trading agreed to pay a fine of US $75,000 to settle this matter. CME Group has brought other disciplinary actions based on automated trading systems’ malfunctions (click here to see an example in the article, “CME Group and ICE Futures U.S. Each Fine a Trader for Automated Trading System Malfunction” in the Bridging the Week edition of March 29, 2015);
  • Manufacturers Life Reinsurance Limited and Wayne Lam agreed to pay fines totaling US $110,000 for allegedly engaging in EFRPs on three days in 2013 to transfer positions from one MLRL account to another;
  • William Chan settled charges that, between September 15, 2014, and January 23, 2015, he engaged in a “pattern of activity” on “several” days whereby he entered orders on one side of platinum, palladium, gold and silver futures markets to effectuate smaller lot orders on the other side. Mr. Chan resolved this matter by agreeing to pay total fines of US $45,000 and serving a 15-day CME Group product trading suspension;
  • UBS AG consented to pay a fine of US $30,000 to resolve two charges: that it engaged in one EFRP transaction without evidence of a related position transaction and that it brokered (as agent) one EFRP transaction but erroneously reported it to NYMEX as a block trade; and
  • SEB Commodities and Thoresen Shipping Singapore PTE each agreed to pay fines of US $15,000 to resolve CME Group charges that they engaged in EFRPs without adequate evidence of a satisfactory related position transaction.

Compliance Weeds: In connection with all EFRPs, one party must be the buyer of the exchange contract and the seller (or holder of short market exposure of) the related position. The related position must be the cash commodity underlying the exchange contract or a by-product, a related product, or an over-the-counter derivative instrument with a “reasonable degree” of price correlation to the exchange contract. An EFRP must entail the “bona fide transfer” of ownership of the related position between the parties or a legally binding contract between the parties in accordance with customary industry practice for the particular related position transaction. (Click here for further details regarding bona fide EFRPs in the article, “Lord Voldemort Hovers Over the Futures Industry: CME Prohibits All Transitory Exchange of Futures for Related Positions by Name” in the Between Bridges edition of April 14, 2014.)