CNCGC Hong Kong Ltd., a cotton merchant or dealer, agreed to settle charges brought by the Commodity Futures Trading Commission that, on 53 occasions from March 2014 through August 2015 the firm failed to file CFTC Form 304 reports detailing all its call cotton purchases and sales as of the close of business on the relevant Friday, as required, and on two occasions – one in October 2015 and one in January 2016 – filed late reports. (Call cotton refers to physical cotton contracted to be purchased or sold or actually bought and sold for a later-to-be-determined price based upon a specified futures contract’s price.) Under CFTC rules, cotton merchants or dealers that hold or control 100 cotton futures positions are required to prepare Part III of CFTC Form 304 reports as of the close of each Friday, and to submit such reports to the CFTC within two business days. According to the Commission, after staff alerted CNCGC of its obligations on July 28, 2015, it fully complied with its requirements regarding the CFTC Form 304 except for two subsequent occasions. CNCGC agreed to pay a fine of US $150,000 to resolve this matter.
Compliance Weeds and My View: 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. 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. 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. In announcing its settlement with CNCGC, the CFTC summarized its prior recent actions involving cotton call reporting violations since 2013 – all of which involved foreign entities (click here to access). However, despite CFTC staff issuing an advisory in 2013 regarding Part III of its Form 304 – which currently is buried on a page of assorted CFTC advisories on various topics (click here to access the CFTC Advisory; click here to access the page on which the CFTC advisory is located) – it is not really clear why or how a non-US cotton merchant or dealer would ordinarily be aware of its obligations to the CFTC. It would be a better use of CFTC resources to more effectively educate non-US market participants regarding their obligations, than to prosecute them. The CFTC recently 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.)