CME Group settled a large number of charges against multiple respondents, the largest group involving allegations against JB Drax Honore Inc., a Chicago Mercantile Exchange, Inc. member, and its affiliate, JB Drax Honore UK Ltd., as well as against various of their desk brokers, claiming that they routinely disclosed customer orders involving Eurodollar options, in order to pre-arrange executions against other customers. The company and its desk brokers only sent these orders to the relevant trading pit for execution after they arranged both sides to the transaction or guaranteed a fill to a customer, said the CME Group. The alleged violations mostly occurred in 2012 and 2013. To settle these matters, JB Drax Honore Inc. agreed to pay a fine of US $70,000 and JB Drax Honore Ltd., a fine of US $55,000, for failing to supervise their employees. Simultaneously, a number of individuals, a portion of whom were expressly affiliated with JB Drax Honore Inc. (according to the National Futures Association’s BASIC database) settled charges with CME Group related to their handling of customer orders involving Eurodollar options for fines ranging from US $17,000 to US $50,000 and CME Group trading suspensions from seven to 15 business days. Separately, JB Drax Honore Inc. also agreed settle charges that, from at least July 8 to September 25, 2013, two of its employees, a desk clerk and a desk supervisor, directed brokerage groups to cross a minimum number of opposing JB Drax Honore Inc. customer orders involving Eurodollar options, or threatened to use “alternative execution avenues” including block transactions, to effectuate such trades. JP Drax Honore Inc. agreed to pay a fine of US $125,000 to resolve this matter. The two individuals, apparently Thomas Conrick and James Werner, agreed to pay fines of $35,000 and $25,000 and not to trade any CME Group product for 10 weeks and six weeks, respectively, to settle charges leveled against them. Unrelatedly, CME Group brought and settled charges against Perdue Agribusiness Incorporated for entering into three exchange for related position transactions that involved more than two parties (typically there are only two parties to such transactions). The firm agreed to pay a fine of US $20,000 to resolve this matter. CME Group also settled with another firm, Protein Sources Milling, LLC for payment of a US $30,000 fine for the firm’s entering into eight exchanges for physical positions where there was no exchange of a related cash position. According to CME Group, “the purpose of the transactions was to offset positions between two Protein Source accounts.” Finally CME Group settled (1) with one trader (Ashley Ball) for payment of a US $7,500 fine and a 30 business day trading suspension for her alleged engagement in numerous buy and sell transactions for the same beneficial owner in order to “roll and flatten positions;” (2) with another trader (John Berg) for payment of a fine of US $25,000 and a 10 business day trading suspension for engaging in 39 wash trades involving 1,324 soybean and wheat options on futures contracts for the purpose of moving positions between accounts; and (3) with two traders (Aaron King and David King) for an aggregate penalty of US $45,000 and a 25 business day trading suspension for Nathan King, for entering orders into the Globex during the pre-opening period solely for the purpose of identifying the depth of market on one or more occasions from August 1 through November 30, 2011.
Compliance Weeds: The CME Group has strict rules regarding pre-execution communications and crossing orders. In general, where permitted, pre-execution communications may only occur for a party who previously has consented to such communications, and parties involved in a pre-execution communication may not disclose the details of such communication to other parties or place an unrelated order to take advantage of conveyed information. Chicago Board of Trade, New York Mercantile Exchange, and Commodity Exchange, Inc. rules expressly prohibit all pre-execution communications in connection with transactions executed on a trading floor; CME likewise prohibits all pre-execution communications for trading floor executed transactions except for those in accordance with CME rules related to large order execution. CME, NYMEX and COMEX permit pre-execution communications (in accordance with applicable rules) on all futures products traded on Globex, but CBOT only permits pre-execution discussions for certain futures products. CBOT pre-execution communication rules regarding options contracts are even more complex. In general, CME Group rules on pre-execution communications and crossing trades are difficult to follow and require strict review. (Click here to access CME Rule 539 and here to access CME Group MRAN RA1410-5 (December 15, 2014)). Crossing trades in violation of exchange rules potentially also violates the Commodity Futures Trading Commission’s prohibition against non-competitive trades. (Click here to access CFTC Rule 1.38(a).)