In an unusual Friday evening blitz after 6 pm ET, the Commodity Futures Trading Commission announced the filing and settlement of 12 enforcement action against multiple firms and individuals for violations of applicable laws and CFTC rules.

Audit Trail Retention Breakdown

In one action, the CFTC said that ABN AMRO Clearing Chicago LLC did not retain, as required, electronic audit trail information for 65 clients. This problem was discovered when the CFTC found gaps and missing transaction records in the firm’s production in response to a request for documents related to one client. Afterward, ABN initiated an internal investigation and discovered its more widespread breakdowns. These were caused by the failure of an archiving system to copy data supplied to the firm by an external vendor from January 24, 2014, through August 28, 2015. The CFTC noted that, although ABN had a recordkeeping system in place, it had no system to monitor whether its archiving system was properly collecting or storing data. ABN agreed to pay a fine of US $160,000 to resolve the CFTC’s enforcement action. In accepting the firm’s settlement, the CFTC noted ABN’s cooperation and self-efforts to determine the scope of its problems.

Unregistered Commodity Trading Advisor

Mobius Risk Group LLC resolved an allegation by the CFTC that, from approximately October 2012 to August 15, 2018, it acted as a commodity trading advisor in providing risk management advice to its energy clients – which included views related to the advisability of trading in over-the-counter swaps and commodity options in oil, natural gas and liquefied natural gas – without registering as a CTA. Among other things, claimed the CFTC, during the prior one year, the firm provided trading advice to more than 15 persons, and the advice was not incidental to Mobius’s overall business. Services Mobius provided in the normal course – all for a flat fee – included market analysis and monitoring, risk strategy management, customized risk management services, market forecasting and trade execution as agent. Mobius’ clients apparently were all eligible contract participants and legally qualified under applicable law to enter into OTC swaps. The firm consented to pay a fine of US $75,000 to resolve the CFTC’s allegations.

Reporting Violations

Honouround (HK) International Trade Co. Ltd – a Hong Kong-based entity – agreed to pay a fine of US $300,000 to settle CFTC claims that it violated position limits in soybean futures traded on the Chicago Board of Trade between March and April 2017, and failed to file CFTC Form 204 reports regarding its fixed-price cash positions in soybeans and related positions during the same time it exceeded speculative position limits. During the relevant time, said the CFTC, the firm violated both the single-month and all-month 15,000 contracts limit then in effect. Although the CFTC said it twice emailed Honouround relevant Form 204s after its position limit breaches, the Commission claimed the firm did not file the Form 204s until July 2018, after it became aware that the Division of Enforcement would recommend an enforcement action against it.

Unrelatedly, NatWest Markets Plc (formerly The Royal Bank of Scotland plc) consented to a fine of US $750,000 for not timely and accurately reporting hundreds of thousands of swap transactions to a swap data repository as required under applicable requirements. Among the firm’s alleged failures was that it under- and over-reported transactions, misreported transactions, and failed to timely report swaps transactions executed prior to the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act but that were in effect on or after April 25, 2011 (“pre-enactment swap transactions”). The CFTC said that RBS’s errors related to swaps creation data, swaps continuation data, unique swap indicators, pre-enactment swap transactions, and corrected swaps data; they occurred from January 2013 to the present. In accepting NatWest’s settlement, the CFTC noted the firm’s cooperation with staff and investigation into RBS’s deficiencies.

Forex and Binary Options

The CFTC also filed and settled eight separate enforcement actions against firms and individuals, claiming that the firms acted as a CTA or commodity pool operator, and the individuals as associated persons, without required registration, when they advised, engaged in discretionary trading, or managed funds on a collective basis for retail customers related to foreign exchange and binary options. The firms and individuals settled the CFTC’s charges by, among other things, agreeing to desist from the purportedly wrongful conduct and paying fines that, in aggregate, totaled US $950,000.

Compliance Weeds: Commercial firms providing risk management services regarding tangible commodities must be careful not to engage in activities that inadvertently cause them to run afoul of CFTC registration requirements, such as providing recommendations on futures or swaps trading for a fee as described in the CFTC’s action against Mobius, or processing customers’ orders for futures contracts, holding their positions, and accounting for profits and losses on their behalf.

In March 2017, Davisco Foods International, Inc., an international cheese and food ingredient company headquartered in Le Sueur, Minnesota, agreed to pay a fine of US $150,000 to the CFTC to resolve allegations that it acted as an FCM without being registered as required by law in connection with a hedging program it administered for its milk suppliers. The CFTC claimed that Davisco’s milk suppliers placed orders with the firm for CME milk futures contracts that Davisco then executed for its own trading account. Suppliers subsequently received “debits and credits” to their accounts at Davisco. (Click here for background in the article “Price Protection Is Price Protection Is Price Protection – Unless It’s FCM Activity Says CFTC” in the April 2, 2017 edition of Bridging the Week.)

Likewise, persons trading futures in any of the futures contracts for which the CFTC has established express position limits must be mindful of their potential obligation to file Form 204s with the CFTC if they are hedgers and exceed such levels, except for persons trading cotton that may have additional requirements under Form 304. (The relevant futures are those involving corn and mini-corn, oats, soybeans and mini-soybeans, wheat and mini-wheat, soybean oil, soybean meal, hard red spring wheat, cotton no. 2 and hard winter wheat; click here to access CFTC Rule 150.2.)

CFTC Form 204 (Statement of Cash Positions in Grains, Soybeans, Soybean Oil and Soybean Meal) and Parts I and II of Form 304 (Statement of Cash Position in Cotton – Fixed Price Cash Positions) must be filed by any person that holds or controls a position in excess of relevant federal speculative position limits that constitutes a bona fide hedging position under CFTC rules. These documents must be prepared as of the close of business on the last Friday of each relevant month.

Part III of CFTC Form 304 (Unfixed Price Cotton “On-Call”) must be filed by any cotton merchant or dealer that holds a so-called reportable position in cotton (i.e., pursuant to large trader reportable levels; this is currently 100 contracts) regardless of whether or not it constitutes a bona fide hedge. Form 304 (Part III) must be prepared as of the close of business on Friday every week, and received by the CFTC in New York by no later than the second business day following the date of the report.

Form 204 must be received by the CFTC in Chicago by no later than the third business day following the date of the report, while Parts I and II Form 304 must be received by the Commission in New York by no later than the second business day following the date of the report.

(Click here to access applicable CFTC rules related to Forms 204 and 304. Click here to access a 2013 CFTC Advisory on Form 304.)

The CFTC proposed changes to its Form 204s and 304s as part of its re-proposed regulations establishing position limits for 25 core physical commodity futures contracts and their economically equivalent futures, options and swaps. (Click here for details in the December 19, 2016 Advisory, “CFTC Finalizes Aggregation Rules and Re-Proposes Positions Limits Rules” by Katten Muchin Rosenman LLP.)