Cargill de Mexico SA agreed to pay a fine of US $500,000 to the Commodity Futures Trading Commission for executing wash sales on the Chicago Board of Trade and the Kansas City Board of Trade. According to the CFTC, on multiple occasions between March 2010 and August 2014, Cargill employees entered matching orders electronically for separate firm accounts, timing the opposite orders “to be as close to simultaneously as possible – often entering orders within less than a second.” The transactions involved CBOT corn, soybean and wheat futures contracts, and KCBT hard red wheat futures contracts. Cargill claimed it engaged in these transactions to transfer trades “in order to move hedging positions for its physical business among numerous accounts.” According to the CFTC, “Cargill de Mexico typically effected transfers between accounts by contacting its clearing broker and effecting transfers pursuant to the policies of the clearing broker and the rules of a designated contract market. However, in some instances, and in particular near or after the notice date, its clearing broker would not make the back office transfers due to applicable contract market rules. In these situations Cargill de Mexico traders transferred the positions using the market but did so in a non-competitive fashion by entering equal and opposite transactions.” In addition to paying a fine, to resolve this matter, Cargill also agreed to cease and desist from undertaking other non-competitive transactions in the future. Earlier this year, Cargill and two of its employees were fined US $80,000 in aggregate by CME Group for engaging in wash sales on six days between June 2013 and January 2014. CME Group alleged that, on these days, the two employees — Jesus Avila and Jose Gamboa — traded agricultural products involving opposite positions in the same delivery month when they “reasonably should have known” that the orders would trade against each other on Globex. The individual respondents also agreed to a five-day CME Group trading prohibition as part of their sanctions. (Click here for further details regarding the CME Group disciplinary action in the article “CME Group Sanctions Firm and Traders for Wash Sales Used to Transfer Positions and Another Firm for a Deficient Algorithm” in the March 1, 2015 edition of Bridging the Week.)
Compliance Weeds: Transfers of positions between non-independently controlled accounts of the same beneficial owner should be accomplished using the transfer rules of the relevant exchange, not through non-competitive trades, including exchange for related position transactions. (Click here for applicable CME rule (853), and here for applicable ICE Futures U.S. rule (4.11).)
My View: Just last week I noted that some would question why the CFTC would bring an enforcement action where an exchange had brought a materially identical disciplinary action previously. In the relevant case involving Robert McMahon, I concluded there likely was arguable justification for the CFTC's "me too" action in light of the fact the allegations involved fraud, and the relevant exchange could not ban the individual from trading on all exchanges but solely its own. (Click here to access full details in the article entitled, "Trader Fined US $171,000 by CFTC for Deceptive Trade Allocation Scheme Utilizing Block Trades; CME Group Previously Alleged Similar Wrongdoing" in the September 20, 2015 edition of Bridging the Week.) This case is different. Here the charges involve a few incidents of a discrete type of trade practice offense – wash sales – and there is no allegation of fraud or any widespread market offense, such as manipulation. As a result, even though the CME Group previously charged only offenses that occurred on its exchange (and not on the Kansas City Board of Trade), the exchange-action carried an appropriate sanction and conveyed an appropriate message. The CFTC's "me too" action here appears a misuse of scarce resources.