CME Group Exchanges brought and settled 12 separate disciplinary actions involving violations of its rules related to exchange for related position transactions involving eight non-members and one member for fines between US $15,000 and US $35,000 apiece. The actions involved allegations of engaging in EFRPs without a transfer between the relevant parties of ownership of the cash commodity underlying the exchange contract, or a by-product, related product or an over-the-counter instrument; engaging in transitory EFRPs (e.g., involving a simultaneous or close-in-time offset of the related position to the EFRP between the relevant parties without market risk); or engaging in EFRPs for the impermissible purpose of transferring positions between related entities of a corporate group. In a separate action, the New York Mercantile Exchange brought and settled charges against Joshua Bailer, a non-member, for allegedly layering large orders on one side of the market to effectuate fills of smaller orders on the other side of the market on multiple times from October 2014 through January 2015. Mr. Bailer agreed to pay a fine of US $35,000 and serve a 10-business-day CME Group product trading prohibition to resolve this matter.
Compliance Weeds: Although most of the CME Group disciplinary actions involved incidents from 2013 and 2014, some involved conduct that occurred in 2015. Hopefully, by now, it is clear that the CME Group is aggressively prosecuting violations of its EFRP rules. All EFRP transactions must involve the bona fide transfer of the cash commodity underlying the exchange contract, or a by-product, related product or an over-the-counter instrument. A liquidation of the related position that occurs simultaneously or close-in-time without the parties incurring market risk will likely cause the EFRP to be deemed a prohibited transitory EFRP. Although EFRPs may be conducted between different trading units within one corporate group or even within one company, they must be for units under independent control and not to transfer positions from one trading operation to another. (Click here for details in of CME Group’s requirements regarding EFRPs; click here for background on a 2013 Commodity Futures Trading Commission rule review of CME Group that appears to have been the impetus for CME Group’s tougher enforcement practices regarding EFRPs in the article, “Alphabet Soup Under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs (EFPs, EFRs, and EOOs) Suggests Tougher Times for Traders and FCMs; Time to be Proactive” in the April 6, 2013 edition of Between Bridges.”)