On November 6, 2017, the U.S. Commodity Futures Trading Commission (“CFTC”) filed a settled enforcement action against Cargill, Inc. (“Cargill”), an agriculture commodities trader, for allegedly misrepresenting the mid-market marks of swaps to counterparties and in reports to its swap data repository (“SDR”), in violation of the Commodity Exchange Act (“CEA”) and commission regulations. Cargill consented to the CFTC’s order and agreed to pay a penalty of $10 million, without admitting or denying the Order’s findings. In the Matter of Cargill, Inc. CFTC No. 18-03 (Nov. 6, 2017).
Cargill registered as a swap dealer in February 2013. Section 4s(h)(1) of the CEA requires all registered swap dealers to disclose certain information to potential counterparties, including the swap dealer’s material incentives and conflicts of interest related to the swap, the mid-market mark of the swap, and a daily mark of each uncleared swap transaction.
The CFTC alleged that, between 2013 and June 2016, despite concerns that its conduct did not meet the requirements of CFTC regulations, Cargill chose to provide marks on certain complex swaps that were based on termination values, which included a portion of Cargill’s estimated revenue during the first 60 days of the swaps, and also credited the counterparties with a portion of its estimated revenue if the counterparty terminated the swap during that same period. The CFTC claimed that this method had the effect of concealing from the counterparty the full revenue that Cargill expected to make from the swap transaction, up to 90 percent of Cargill’s mark-up, and that Cargill adopted it because it was concerned that providing additional transparency (as required by CFTC regulations) might reduce its revenue.
The CFTC also alleged that Cargill failed to supervise its employees in connection with the providing of marks, and in connection with the allegedly inaccurate statements made to swap counterparties based on prices derived by a proprietary grain marketing program used by Cargill. According to the CFTC, this program allowed customers to enroll commodities with Cargill for forward delivery, and Cargill set the futures hedge component of the price it would pay for these commodities on delivery by hedging the enrolled commodities with futures and options. The CFTC claimed that when third party marketers used the program, Cargill, as a swap dealer, engaged in swaps with these marketers, and then reported the percentage that accounts for particular enrolled commodities were hedged, but that Cargill employees at times would change the “percent hedged” and not disclose to swap counterparties the actual percent that the contracts were hedged.
In addition to the financial penalty, the CFTC ordered Cargill to comply with a number of undertakings specifying the manner in which it should provide marks going forward, but also with respect to broader areas of internal controls.
The CFTC order included numerous allegations that employees within Cargill had escalated concerns about Cargill’s reporting of the mid-market marks both before and after Cargill’s registration as a swap dealer without any changes being made. These claims, together with the suggestion that Cargill consciously chose to evade CFTC rules in order to protect its revenue, almost certainly contributed to the size of the penalty and severity of the undertakings.
Click here to view In the Matter of Cargill, Inc.