The New York Mercantile Exchange settled disciplinary actions against two trading firms for engaging in alleged transitory exchange for related position transactions. In one action, George E. Warren Corporation, a member, agreed to pay a fine of US $20,000 for executing two EFRPs involving the October 2015 RBOB Gasoline futures contract on October 1, 2015 – the last day of scheduled trading for the contract – that the exchange’s business conduct committee claimed were “contingent upon each other” and thus, impermissible. Moreover, claimed the NYMEX BCC, as a result of these transactions, GE Warren established a new position in the October 2015 RBOB contract following the termination of the contract’s scheduled trading – which also is not permitted. Setana Energy Ltd, a non-member, agreed to pay a fine of US $15,000 for apparently trading opposite GE Warren on these transactions and thus also allegedly engaging in prohibited transitory EFRPs. Unrelatedly, Aardvark Trading LLC agreed to pay a fine of US $40,000 to NYMEX because of two breakdowns in one of its automated trading systems. NYMEX claimed that on August 17 and 23, 2012, an Aardvark ATS did not function as intended and caused self-match calendar spread trades in the exchanges’ crude oil contract. This, said NYMEX, caused price and volume “aberrations” on both sides of the market. Previously, Aardvark agreed to settlements with Chicago Board of Trade and the Chicago Mercantile Exchange to resolve similar disciplinary actions. (Click here to access the article, “Non-Member Tipper and Tippee Fined by CME Group for Insider-Trading Type Offenses; Two Member Firms Fined for Algo System Gone Wild” in the October 30, 2016 edition of Bridging the Week.) Finally, HTG Capital Partners LLC agreed to pay a fine of US $15,000 to resolve charges by NYMEX that, on July 9, 2016, an ATS it operated entered five Trading at Settlement orders prior to receiving a security status message that the relevant product group was eligible for TAS orders. Placing TAS orders outside approved times is prohibited by NYMEX rules (click here to access NYMEX Rule 524.A).
Compliance Weeds: Recently both CME Group and ICE Futures U.S. have amended their rules and guidance regarding exchange for related position transactions. Among other things, CME Group recently adopted amendments to its rules and guidance that, among other things, make clear that firms executing or clearing EFRPs must exercise “due diligence” to identify situations where a customer’s EFRP transactions may be “non-bona fide,” and permit EFRPs to contain multiple exchange components that may not have the same market bias. (Click here for background in the article, “CME Group Overhauls EFRP Rule and Guidance; Clarifies Roles of Executing and Clearing Firms and Provides New Relief” in the September 25, 2016 edition of Bridging the Week.) Similarly, ICE Futures U.S. amended its EFPR guidance to make clear that swaps that will settle or forward contracts that may settle through EFRPs will not be considered to be part of prohibited transitory EFRP arrangements where the swap or forward contract is “subject to market risk that is material in the context of the transaction.” (Click here for background in the article, “ICE Futures U.S. Proposes to Authorize Settlement of Certain Forward Contracts and Swaps through EFRPs” in the October 9, 2016 edition of Bridging the Week.)