ADM Investor Services, Inc. agreed to pay a fine of US $650,000 to the Commodity Exchange, Inc related to its alleged mishandling of the account of a brokerage firm client from March 2012 through May 2018. According to a panel of the exchange’s business conduct committee, beginning in March 2012, ADMIS learned that the customer "automatically" offset positions in its omnibus account on a first-in first-out basis. The BCC panel claimed this information was never escalated to the appropriate person at ADMIS, however. 

Also, beginning February 2017 through at least May 2018, said the panel, at least one ADMIS employee became aware that, in connection with copper futures, the customer was misreporting position data to the exchange. Following this, ADMIS allegedly provided the client with incorrect guidance, and purportedly assisted the client in misreporting. As a result, claimed the BCC panel, “ADMIS failed to require the client to provide” accurate reporting information as required under exchange rule (click here to access Rule 561(C)). 

Finally, alleged the panel, after COMEX began a series of investigations regarding ADMIS’s client in September 2017, the client’s responses to COMEX’s requests were “untimely and inaccurate” and on multiple occasions, ADMIS passed along audit trail data provided by its client that was not correct. The panel also charged ADMIS with failing to “properly” supervise employees about escalation procedures after one of its employees recognized the client violated exchange rules.

Separately, three market participants consented to sanctions by CME Group exchanges for purportedly not reporting block trades to the relevant exchange timely and accurately. The firms were Coquest Inc. that agreed to a US $150,000 fine to the New York Mercantile Exchange and disgorgement of US $74,365; Creditex Securities Corporation which consented with NYMEX to a US$ 60,000 fine; and GFI Brokers Limited which agreed with COMEX and NYMEX to pay a US $70,000 fine. Coquest was also charged with trading opposite a customer through a company-controlled account at prices advantageous to Coquest after receiving the customer’s block trades orders but prior to consummating the relevant transactions. The relevant exchanges also charged Creditex – part of the ICE group of companies – and GFI with failing to adequately advise and train their employees regarding CME Group’s block trades rules.

Additionally, Liang Chen and Tanius Technology LLC were each charged with unrelated breakdowns in their automated trading systems that caused disruptions to relevant markets. Mr. Chen agreed to pay a US $30,000 fine and be banned for 30 days from accessing any CME Group exchange and Tanius consented to pay a US $35,000 fine.

Compliance Weeds1: FCMs carrying omnibus accounts either for other FCMs or foreign brokers have special obligations in connection with such accounts. At the highest level, FCMs' risk management programs must provide for specific due diligence and oversight for the carrying and surveillance of all omnibus accounts.

Most importantly, omnibus accounts – accounts disclosed in the name of a brokerage entity but ordinarily containing positions of non-disclosed ultimate customers of the brokerage firm – should not be set-up on a first in-first out basis unless there is solely one underlying customer and should be carried and margined on a gross basis assessing at least exchange-minimum maintenance margin levels. (Click here to access CFTC Rule 1.58(a) and here for Joint Audit Committee Regulatory Alert 18-02 (June 6, 2018).) However, individual positions in an omnibus account may be margined as spread or hedge positions provided the carrying FCM receives and retains a written representation from the omnibus broker that each such position is entitled to be so margined (see CFTC Rule 1.58(b)). Omnibus accounts margin calls should be met within three business days where Day 1 is the day a margin call arises because of new positions and/or market moves, Day 2 is when a margin call is issued and Day 3 is the first day a margin call is outstanding; on Day 3 an FCM must book an undermargined charge in connection with a delinquent omnibus account margin call (see JAC Alert 18-02).

Omnibus accounts should be clearly identified on the records of an FCM, demarcated as house or customer, and set up to ensure that domestic futures and options, non-US futures and options and swaps are maintained in separate customer protection environments. (Click here to access a relevant Commodity Futures Trading Commission Division of Swap Dealer and Intermediary Oversight guidance (September 28, 2012). See also JAC Alert 18-02.) FCMs must ensure they receive reports of daily close-outs of positions in an omnibus account on a timely basis so they may remit required position information timely to the CFTC, other FCMs or clearing houses, as necessary. (Click here to access CFTC Advisory 13-16 (May 23, 2013).)

Special notification requirements pertain to omnibus accounts meeting payment obligations in other than readily available funds. (Click here for NFA Compliance Rule 2-33.) Also, immediate notification to the CFTC and the FCM's self-regulatory organization is required when a trading account carried for another FCM must be liquidated or transferred due to the account's failure to meet a margin call. Click here to access CFTC Rule 1.12(f)(2).

Other obligations for omnibus accounts also apply. FCMs should be aware of all their obligations under CFTC, NFA and exchanges' requirements (click here, e.g., to access CME Group RAS17813-5 (see section entitled Omnibus Account Reporting)).

Compliance Weeds2: With increasing regularity, clearing members are being held responsible by regulators for allowing clients to continue to allegedly violate applicable rules, not taking appropriate action when on notice of such violations, and/or passing along to regulators inaccurate information received from clients.

In 2016, the CFTC named Advantage Futures LLC, another FCM, in an enforcement action related to the firm’s handling of the trading account of one customer in response to three exchanges’ warnings, among other matters. The firm and the two officers that were named as defendants agreed to pay a fine of US $1.5 million to resolve the CFTC action. According to the CFTC, between June 2012 and April 2013, three exchanges alerted Advantage to concerns they had regarding the trading of one unspecified customer’s account which they considered might constitute disorderly trading, spoofing and manipulative behavior, in violation of the exchanges’ relevant rules. The CFTC claimed that Advantage initially failed “to adequately respond to the [exchanges’] inquiries and did not conduct a meaningful inquiry into the suspicious trading.” Only after the three exchanges threatened to hold Advantage responsible for its customer’s conduct did Advantage cut off the trader’s access to the three exchanges. However, Advantage failed to augment its oversight of the trader’s remaining trading or control his access to other exchanges “despite knowing that he employed the same strategy across all markets.” (Click here for background in the CFTC enforcement action against Advantage Futures in the article “FCM, CEO and CRO Sued by CFTC for Failure to Supervise and Risk-Related Offenses,” in the September 25, 2016 edition of Bridging the Week.)

In 2017, Merrill Lynch, Pierce, Fenner & Smith Incorporated agreed to pay a fine of US $2.5 million to resolve charges brought by the CFTC that it failed to diligently supervise responses to a CME Group Market Regulation investigation related to block trades executed by its affiliate, Bank of America, N.A. on the CME and the Chicago Board of Trade. The CFTC said that the responses provided by BANA were not accurate. However, there was no indication that Merrill Lynch was aware or had reason to believe that its affiliate’s responses were inaccurate. (Click here for further details in the article “FCM Agrees to Pay US $2.5 Million CFTC Fine for Relying on Affiliate’s Purportedly Misleading Analysis of Block Trades for a CME Group Investigation,” in the September 24, 2017 edition of Bridging the Week.)

COMEX’s current disciplinary action against ADMIS is the latest example of the trend.

In response, FCMs should have policies and procedures that require employees to promptly escalate knowledge or even concerns about clients’ possible non-compliance with rules, and require supervisors promptly to evaluate and act-upon (or formally close-out, if warranted) such information. Moreover, firms should not blindly pass along to regulators information received from clients they suspect may be inaccurate; at a minimum, FCMs should challenge their clients regarding such information, and consider maintaining evidence of such challenge and outcome.