A Staten Island individual and his firm were fined $280,000, and subjected to a four-year trading ban, for entering into and reporting numerous non-bona fide exchange for physical transactions (“EFPs”) on a U.S. exchange.  From January 2010 to August 2012, the defendants entered into numerous EFPs that violated exchange rules because they lacked a corresponding and related cash position.  CFTC Rule 1.38 generally requires all futures contracts to be executed openly and competitively, though an exception permits transactions that are executed non-competitively if they are done in accord with the applicable written rules of the contract market.

As is common, the U.S. exchange required that for cleared EFPs, one party must be both the buyer of the related position and seller of the futures contract, or seller of the related position and buyer of the futures contract.  Because the defendants lacked related cash positions, the EFPs were not valid and violated both the U.S. exchange’s rules and CFTC Rule 1.38.