This report summarizes material notices from CME Group and ICE Futures, with a particular focus on energy. It is not intended to be a comprehensive review of each and every notice issued by these Exchanges.
On April 21, 2015, the CFTC announced via press release that charges had been filed against a resident of the United Kingdom (“UK”), Navinder Singh Sarao (“Sarao”), and his company, Nav Sarao Futures Limited PLC, for price manipulation and spoofing. The charges came after a comprehensive investigation of Sarao’s trading activity by the CFTC, which included assistance from the SEC, DOJ, FBI, the CME Group, the UK’s Financial Conduct Authority (“FCA”), and Scotland Yard. The DOJ unsealed its own criminal Complaint charging Sarao with willfully engaging in a scheme to defraud, knowingly manipulating the price of a commodity, and knowingly engaging in trading practices in violation of CME rules. Sarao was arrested by British authorities shortly before the CFTC and DOJ charges were unveiled.
Specifically, the CFTC alleges that Sarao unlawfully manipulated and spoofed the market for E-mini S&P 500 near month futures contracts, by using a trading platform to “automatically and simultaneously ‘layer’ four to six exceptionally large sell orders into the visible E-mini S&P central book…with each sell order one price level from the other.” When the price of the commodity would move, the layering algorithm would modify “the price of the sell orders to ensure that they remained at least three or four price levels from the best asking price; thus remaining visible to other traders, but staying safely away from the best asking price.” Sarao would then cancel most of the orders without executing any transactions, which would create “imbalances…in the order book” which allowed Sarao to trade in a manner “designed to profit from this temporary artificial volatility.”
The CFTC believes that over the course of five years, Sarao profited over $40 million from trading in the E-mini S&P contracts in this way. It is thought that Sarao utilized the layering algorithm on over 400 trading days. Further, the CFTC alleges that Sarao’s activities significantly contributed to the Flash Crash of May 6, 2010.
Sarao’s assets have been frozen pending the upcoming litigation, wherein the CFTC seeks a permanent injunction, disgorgement, civil monetary penalties, trading suspensions or bans, and payment of costs and fees. A preliminary hearing with regards to the CFTC’s request for a preliminary injunction was scheduled for May 1, 2015.
The CFTC Press Release, No. PR7156-15, can be found here:http://www.cftc.gov/PressRoom/PressReleases/pr7156-15.
A copy of the criminal Complaint filed by the DOJ against Sarao can be found here: http://www.justice.gov/sites/default/files/opa/press-releases/attachments/2015/04/21/sarao_criminal_complaint.pdf.
The DOJ Press Release can be found here:http://www.justice.gov/opa/pr/futures-trader-charged-illegally-manipulating-stock-market-contributing-may-2010-market-flash.
Rule Changes and Other Advisory Notices
ICE- FOLLOW @ICE_MARKETS for ENERGY UPDATES
Now interested individuals and entities can follow ICE energy developments on Twitter, by following the handle @ICE_Markets. The Twitter handle will provide updates on new products, volumes, trading trends, and market commentary.
ICE FUTURES U.S.- ELIMINATION OF DUPLICATION REPORTING PROVISIONS OF RULE 4.11
On April 27, 2015, pending regulatory review, ICE was to amend Rule 4.11 to eliminate provisions regarding Duplications for all contract months, commencing with October 2015 Sugar No. 11 contracts and September 2015 contracts for Coffee “C,” Cocoa, and Sugar No. 16.
ICE SEF NOTICE: LEAP SECOND IMPACT
On June 30, 2015, ICE will add a leap second to their clocks to synchronize their atomic clocks with astronomical time, in order to keep the clocks accurate. In order to effectuate the leap second, ICE will delay all market state transitions which would normally occur between June 30th 23:00 GMT and July 1 00:01 GMT.
CME GROUP- MARKET REGULATION ADVISORY NOTICE RA1506-4- BLOCK TRADES
This notice supersedes Notice RA1505-4 from March 30, 2015. Pending regulatory review, NYMEX was to begin permitting block trading in various products, concurrent with the launch of trading in those products on April 19, 2015.
CME GROUP- MARKET REGULATION ADVISORY NOTICE RA1505-5
This notice supersedes Notice RA1407-5 from September of 2014. CME Group is changing the list of products that are subject to large trader reporting requirements under CFTC Part 20 Regulations.
NYMEX and COMEX MARKET REGULATION ADVISORY NOTICE RA1507-4
This notice supersedes Notice RA1411-4 from November 20, 2014. Effective May 17, 2015, COMEX will begin to permit Copper futures trades in the second active contract month and block trades in the first and second active contract months to be priced at the settlement price or any valid price increment ten ticks higher or lower than the settlement price. The notice advises review of Rule 524, which includes important regulatory considerations for participants engaging in TAS, TAM, or MO transactions. However, no changes were made to Rule 524.
CME GROUP- SPECIAL EXECUTIVE REPORT SER-7332
Chapter 1A has been eliminated from the CBOT Rulebook based on the fact that the incentive program it pertained to expired on December 31, 2014.
CME GROUP- MARKET SURVEILLANCE UPDATE
Pending all relevant regulatory review, effective May 28, 2015, NYMEX will decrease the spot month position limits for the NYMEX Palladium futures and option contracts to 400 futures contract equivalents.
CME GROUP- MARKET SURVEILLANCE UPDATE
CME Group has announced the aggregation allocations, spot month position limits, single month and all month accountability levels, and reportable levels for the new Renewable Identification Number (RIN) 2015 Futures contracts. These three new contracts were listed for trade date April 20, 2015.
CME GROUP- MARKET SURVEILLANCE UPDATE Pending all regulatory review, effective May 1, 2015, CME will amend the USD Denominated Ibovespa Futures contract (in CME Rulebook Chapter 354), to reflect a change in position limits from 3,500 all months combined, in net futures equivalents, to 3,500 contracts per maturity, in net futures equivalents. Chapter 5 of the CME Rulebook will also be amended to reflect new position limits, position accountability and reportable levels for the contact.
ICE Futures Europe (Rule Changes & Other Advisory Notices)
ICE FUTURES EUROPE CIRCULAR 15/076 and ATTACHMENT
On April 27, 2015, the ICE Low Sulphur Gas Oil Futures and Options contracts were amended to have a settlement window reduced from three minutes to two minutes.
ICE FUTURES EUROPE CIRCULAR 15/079
ICE Futures Europe is rescheduling the launch of various Equity Index Futures. The new date of introduction is TBD.
ICE FUTURES EUROPE CIRCULAR 15/080 and ATTACHMENT
Subject to relevant regulatory review, ICE Futures Europe will cease to admit trading in RBOB Gasoline v. Argus Eurobob Differential Futures contracts.
ICE FUTURES EUROPE CIRCULAR 15/081
In response to the introduction of an intra-day auction by the London Stock Exchange, ICE Futures Europe is going to conduct a market consultation with regards to the timing of the Exchange Delivery Settlement Price (“EDSP”) Auction for FTSE 100 and FTSE 250 Index Contracts. As part of the consultation, ICE Futures Europe is seeking responses representing the thoughts of each firm.
ICE FUTURES EUROPE CIRCULAR 15/083 and ATTACHMENT
ICE Futures Europe is extending the Commercial Terms and eligibility criteria for the Developing Regions Programme to December 31, 2015. The Developing Regions Programme was introduced by Circular 07/075 in June of 2007, and was extended previously in March of 2010.
ICE FUTURES EUROPE CIRCULAR 15/084 and ATTACHMENT
ICE Futures Europe is changing the timing for the Designated Settlement Period for various Coal Futures. Also, the Exchange is changing Rule WW.4 to narrow the window between the determination of futures settlement prices and the expiry of the options contracts.
ICE FUTURES EUROPE CIRCULAR 15/086 and ATTACHMENTS
ICE Futures Europe has proposed amendments to the Contract Rules concerning Swapnote Futures and Contracts, to reflect changes to the name of the underlying benchmark used to calculate the contracts’ EDSP and to update the Schedule for these contracts. The amendments will go into effect on May 12, 2015.
ICE FUTURES EUROPE CIRCULAR 15/088
The ICE Coal Options and Futures Liquidity Programme has been renewed and extended until December 31, 2015.
UBS Securities LLC- 2014-143
Violation of Rule 2.35- Reporting Open Interest to Clearing Organization. Allegedly UBS Securities reported inaccurate open interest for December 2014 Cocoa Futures Contract on two days in November of 2014. $20,000 fine.
Twin Eagle Resource Management- 2014-067
Violation of Rule 6.20(b)-Position Limits, Conditional Limits, and Position Accountability for Energy Contracts. Twin Eagle allegedly held an intra-day position, in one instance, that was in excess of its exemptive spot month limit in a Henry LD1 Fixed Price Futures in June of 2014. $7,500 fine, $154,180 in disgorgement, and cease and desist.
William L. Gottsch – CME 13-9582-BC-2
Violation of Rule 534-Wash Trades Prohibited and Market Regulation Advisory Notice RA0913-5-FAQ. Allegedly, in December of 2012, Gottsch directed his broker to buy and sell equal contracts (723) for two accounts with common beneficial ownership, with the purpose of freshening the long futures position dates and knowing the trades would trade opposite one another. These alleged trades amounted to improper wash trades. $15,000 fine and 15 business day suspension.
Jefferies LLC – CME 14-9941
Violation of Rule 526-Block Trades. See related NYMEX action, below, for facts. $15,000 fine.
Donald M. Gottsch – CME 13-9582-BC
Violation of Rule 534- Wash Trades and Market Regulation Advisory Notice RA0913-5-FAQ. Allegedly, in December of 2012, Gottsch, acting as a broker, executed several buy and sell orders on CME Globex from accounts with common beneficial ownership, with the purpose of freshening long futures position dates and with reasonable knowledge the orders would trade opposite one another. These alleged trades amounted to improper wash trades. $20,000 fine and 15 business day suspension.
Charles Adam – CME 14-9789
Violation of Rule 432-General Offenses. Adam allegedly entered orders on Globex between July of 2013 and March of 2014 that were not made for the purpose of executing bona fide transactions, causing fluctuations in the publicly displayed price. $15,000 fine and 20 business day suspension.
Bisher Khalaf – CME 13-9422
Violation of Rule 534-Wash Trades Prohibited. Allegedly, Khalaf executed numerous wash trades on Globex between March of 2012 and April of 2013. The wash trades were executed for the purpose of transferring positions from one account to the other. $10,000 fine and two month suspension.
Jefferies LLC- NYMEX 14-9931
Violation of Rule 526-Block Trades. On one occasion in November of 2012 and two occasions in July of 2013, Jefferies allegedly executed block trades for customers that were not reported to the Exchange within the applicable time limits and misreported the actual time of execution. $20,000 fine.
E1 Corporation- NYMEX 14-9862
Lack of Documentation
Violation of Rule 538.H-Documentation. Allegedly, on January 3, 2014, E1 entered an EFRP transaction and did not document the related swap transaction. Therefore the EFRP was not bona fide. $7,500 fine.
Merrill Lynch Commodities, Inc.- NYMEX 14-9800
Lack of Documentation
Violation of Rule 538.H-Documentation. On one occasion in December of 2013, Merrill Lynch allegedly entered an EFRP transaction and did not document the related swap transaction. Therefore the EFRP was not bona fide. $7,500 fine.
Nidera US, LLC- NYMEX 14-9800
Lack of Documentation
Violation of Rule 538.H-Documentation. Allegedly, on one occasion on December of 2013, Nidera entered an EFRP transaction and did not document the related swap transaction. Therefore, the EFRP was not bona fide. $7,500 fine.
Susquehanna Government Products, LLP- NYMEX 14-0062
Lack of Documentation
Violation of Rule 538.H-Documentation. Allegedly, in June of 2014, Susquehanna entered an EFRP transaction and did not document eh related swap transaction. Therefore, the EFRP was not bona fide. $7,500 fine.
SummerHaven Investment Management, LLC- NYMEX 14-0062
Lack of Documentation
Violation of Rule 538.H-Documentation. In June of 2014, SummerHaven allegedly entered an EFRP transaction and did not document the related swap. Therefore, the EFRP was not bona fide. $7,500 fine.
Lakeview Energy LLC-NYMEX 14-9801
Pre-Arranged Trades; Lack of Documentation
Violation of Rule 538.H-Documentation and Rule 534-Wash Trades Prohibited. Allegedly, in December of 2013, Lakeview entered several EFRP transactions in which Lakeview was on both sides, done for the purpose of moving positions between two of Lakeview’s wholly owned subsidiaries. The alleged transactions amounted to improper wash trades. Further, Lakeview did not document the physical legs or the cash positions of the EFRP transaction; therefore, they were not bona fide. $35,000 fine.
Robert McMahon- NYMEX 10-7596
Violation of Rule 432-General Offenses. Same facts as COMEX 13-9523, against Robert McMahon, below. Permanent ban.
George Dennis- NYMEX 11-08170
Violation of Rule 432- General Offenses. Dennis failed to appear for a scheduled interview with Market Regulation Staff, materially impacting Market Regulation’s investigation into a potential rule violation. Dennis then failed to answer the charge that he failed to appear and therefore was deemed to have admitted the charge. 5 year suspension.
Jefferies LLC- COMEX 14-9932
Violation of Rule 526-Block Trades and NYMEX/COMEX Market Regulation Advisory Notice RA1205-4. On one occasion in November of 2012, Jefferies allegedly executed a block trade that was not reported in the applicable time limit and misreported two spread transactions as four outright transactions. Also, in July of 2013, Jefferies allegedly executed another block trade that was not reported timely. $22,500 fine.
Daniel Shak- COMEX 10-7522
Violation of NYMEX Legacy Rule 443-Position Limit Violations. Shak allegedly exceeded the accountability limit for Gold Future in September of 2009. $25,000 fine.
Robert McMahon- COMEX 13-9523
Violation of Rule 432-General Offenses. Allegedly, on seven different trade dates between July 2007 and April 2010, McMahon intentionally “cherry-picked” trades intended for his customers. This resulted in his customers being filled non-competitively at inferior prices, which earned McMahon a profit of $178,490. The Exchange described the conduct as “willful” and the plan as a “fraudulent scheme.” McMahon did not respond to the charges and therefore was deemed to have admitted the charges. $100,000 fine, disgorgement of $178,490, restitution of $188,960, and permanent ban.
Heet Khara- COMEX 15-0103-SA-2
Spoofing; Disruptive Trading
Rule 413-Summary Access Denial Actions. On April 30, 2015, CME Group’s Market Regulation Department summarily denied Khara all access to all CME markets, trading platforms, and electronic trading or clearing platforms, and all trading floors. The summary access denial was based on an investigation’s finding that Khara engaged in a pattern of trading activity in which he repeatedly entered orders or layered multiple orders for Gold and Silver futures contracts without the intent to trade. The activity allegedly occurred between February and April of 2015, on multiple trade dates. The investigation found that the layered orders were entered to encourage trades opposite his smaller orders resting on the opposite side of the book. After the small orders were filled, allegedly Khara would then cancel the resting order or layered multiple orders that he had entered on the opposite side of the order book. When Khara was informed he was being investigated, he closed his account at his FCM and moved to a different FCM to engage in the same activity. Allegedly, Khara coordinated his activity with another individual, Nasim Salim. 60 day summary access denial.
Nasim Salim- COMEX 15-0103-SA-A
Spoofing; Disruptive Trading
Rule 413-Summary Access Denial Actions. On April 30, 2015, CME Group’s Market Regulation Department summarily denied Salim all access to all CME markets, trading platforms, and electronic trading or clearing platforms, and all trading floors. The summary access denial was based on an investigation’s finding that Salim engaged in a pattern of trading activity in which he repeatedly entered orders or layered multiple orders for Gold and Silver futures contracts without the intent to trade. The activity allegedly occurred between March and April of 2015, on multiple trade dates. The investigation found that the layered orders were entered to encourage trades opposite his smaller orders resting on the opposite side of the book. After the small orders were filled, allegedly Salim would then cancel the resting order or layered multiple orders that he had entered on the opposite side of the order book. Salim introduced Khara, who is also subject to summary access denial (see above) to his firm FCM. The men are believed to have coordinated their efforts to engage in disruptive trading. 60 day summary access denial.
Thomas Burke – CBOT 10-4973-BC-3
Violation of Rule 521-Requirements for Open Outcry Trades and Rule 539.A-Prearranged, Pre-Negotiated and Noncompetitive Trades Prohibited. Burke allegedly traded as a broker on one or more occasions from September 2008 to July 2009, and in July 2010, trades that were not competitively executed by open outcry. $20,000 fine and 15 business day suspension.
Green Plains Asset Management LLC – CBOT 14-0018-BC
Violation of Rule 562-Position Limit Violations. Allegedly, in November 2014, GPAM exceeded the spot month speculative position limit by 170 contracts in Nov. 2014 Soybean futures. GPAM liquidated the overage when it became aware of it, and did not profit from doing so. $25,000 fine.
Lakeview Energy LLC – CBOT 14-9910
Lack of Documentation
Violation of Rule 538.H-Documentation and Rule 534-Wash Trades Prohibited. See related NYMEX action, above, for facts. $10,000 fine.
NEW PRODUCT LISTINGS
ICE FUTURES U.S. TO INTRODUCE ERIS CREDIT FUTURES
ICE Futures U.S. introduced two new credit futures contracts for trading on April 27, 2015. The credit futures contracts replicate the economics of credit default swaps using the Eris Methodology.
CME GROUP- MARKET SURVEILLANCE UPDATE- MSN04-08-15
NYMEX listed two new Singapore Fuel Oil (Platts) Brent Crack Spread (1000mt) Futures contracts for trade date April 13, 2015. The terms and conditions of the new contracts can be found in NYMEX Rules 559, 560, and 561.
Other Issues to Note
None to note this month.