The Chicago Board of Trade fined Zhi Guo Zhang, a nonmember, US $100,000 for engaging in noncompetitive soybean futures trades between October 8 and November 8, 2012, in order to transfer money from another trader’s account to his trading account. He accomplished this, said the CBOT Business Conduct Committee, by prearranging 240 trades constituting 96 round turn transactions. Mr. Zhang transferred almost US $31,000 through this scheme. Mr. Zhang was also ordered to pay the amount transferred as restitution, and was permanently banned from trading on any CME Group exchange, among other penalties. Separately, Standard Chartered Bank agreed to pay a fine of US $75,000 to settle charges that it engaged in impermissible pre-execution communications in connection with transactions in soybean futures on “several occasions” between December 2012 and February 2013. CBOT claimed that, during the relevant time, SCB discussed specific information regarding contract; side of the market; time of execution; and price and quantity with employees of a counterparty in connection with soybean futures contracts executed in connection with prepaid soybean swap agreements. However, said the CBOT Business Conduct Committee, such pre-execution conversations were not permitted in connection with CBOT agricultural futures contracts.
Compliance Weeds: Generally, for approved contracts only, CME Group exchanges permit pre-execution communications to facilitate trading subject to strict requirements. Among these requirements are that the party on whose behalf a communication is made previously consented to such communication and that no person involved in pre-trade communications takes advantage of information conveyed except to facilitate the relevant trade. Other than for CBOT EU Wheat futures and options, pre-execution communications are never permitted for CBOT grain and oilseed futures at any time. Moreover, CME Group rules regarding cross trades vary by product and by futures and options. Even the mechanical steps for executing a cross trade following a conversation vary. There are Globex Crosses, Agency Crosses, Committed Crosses, and RFQ and RFC Crosses. (Click here to access the relevant CME Group Market Regulation Advisory Notice regarding Pre-Execution Communications (August 16, 2016).) However, despite the complexity, the consequences of getting it wrong can be severe, resulting in not only potential CME Group sanctions, but possible sanctions by the Commodity Futures Trading Commission too. (Click here to access the article “CFTC Fines FirstRand Bank for Unlawful Pre-Execution Discussions Related to Soybean Futures Trades” in the September 1, 2014 edition of Bridging the Week.) Most simply, all noncompetitive trades are strictly prohibited under CFTC rules, and any violation of a CME Group rule regarding pre-execution communications, could also be deemed a violation of this CFTC requirement. Pre-execution communication rules of other designated contract markets are similar but contain important differences from CME Group requirements (click here to access the “Pre-Execution Communication FAQ” of ICE Futures U.S. (dated August 2016) and here to access guidance with respect to executing cross orders on Nasdaq Futures, Inc.).