Commodity Trading Firm Sanctioned US $2 Million by CFTC for Various Offenses Related to Cotton Trading Including Violating Speculative Position Limits: Glencore Grain B.V. and Glencore Ltd. collectively agreed to pay a fine of US $2 million to settle charges by the Commodity Futures Trading Commission that, from January 2013 through November 2015, they violated various laws and Commission regulations related to their trading of cotton futures on ICE Futures U.S. 

In particular, the Commission alleged that the firm violated speculative position limits on “multiple days” in May and June 2013 and May and June 2014; entered into exchange for related position transactions with each other contrary to IFUS rules, and thus prohibited by law and CFTC rule; and failed to file two reports with it of their physical cotton positions that were accurate as of the last day of May 2013 and May 30, 2014, as required.

The Commission alleged that the Glencore entities violated position limits on the applicable occasions when looking at their positions on an aggregate basis, excluding any bona fide hedging positions which would not be included in a calculation of speculative positions. (Click here to access Commodity Exchange Act § 4a(b), 7 U.SC. § 6a(b) and here for CFTC Rules 150.2 through 150.4.) The Commission said that, because one person – Glencore’s Head of Cotton – directly or indirectly controlled the trading at both entities, positions of the two entities were required to be aggregated.

The Commission also said that, under applicable law, wash sales are prohibited, and futures contracts must be executed openly and competitively unless transacted pursuant to an exchange rule it approved. (Click here to access CEA § 4c(a), 7 U.S.C. § 6c(a) and here to access CFTC Rule 1.38(a).) During the relevant time, noted the Commission, IFUS only authorized EFRPs – a potentially approved form of off-exchange transaction – through independently controlled accounts. (Click here to access ICE Futures Rule 4.06(b)(iv).) Since Glencore Grain and Glencore Ltd. were part of the Glencore plc organization and controlled by the same Head of Cotton, EFRPs between the two entities were not for independently controlled accounts and were thus impermissible, alleged the CFTC.

Finally, persons holding or controlling futures and options positions in cotton that are deemed “reportable” under CFTC regulation are required to file a Form 304 report with it showing the persons’ fixed price cotton positions as of the end of each month it has reportable futures positions and options positions. (Click here to access CFTC Rule 19.00(a)(1).) The CFTC alleged that two Form 304 reports filed by Glencore Grain overstated the quantities of its fixed price cotton cash positions.

In March 2016, Glencore Grain agreed to pay a fine of US $200,000 to settle charges by ICE Futures U.S. that, on May 30, 2014 – a day within the time period identified in the CFTC settlement – the firm may have violated position limits in the July 2014 Cotton futures contract. In addition, alleged the exchange, the firm may have caused “price movement” in the relevant futures contract and a corresponding July/December 2014 futures spread when the firm “waited until the final 20 minutes of trading to execute a high proportion of their transactions on the day prior to first notice day.” (Click here for background on the relevant IFUS disciplinary action and Compliance Weeds in the article “IFUS Charges Trader With Possible Spoofing and Market Disruption While Another Entity Is Charged With Allegedly Liquidating Positions in a Disorderly Fashion to Avoid Speculative Limits Issues” in the March 13, 2016 edition of Bridging the Week.)

Compliance Weeds: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 bonafide hedging position under CFTC rules (the speculative limits are the reportable levels for these purposes). These documents must be made as of the close of business on the last Friday of the 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 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. 

Part III of 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; click here to access CFTC Rule 15.03) regardless of whether or not it constitutes a bona fide hedge. Form 304 (Part III) must be made 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. (Click here for additional guidance regarding the Form 304 related to “On-Call” cotton in a 2013 CFTC Guidance.)

(Click here for a copy of CFTC Form 204 and here for a copy of CFTC Form 304.)