Rosenthal Collins Capital Markets LLC (now named DV Trading LLC), a proprietary trading firm, settled charges brought by the Commodity Futures Trading Commission that, from early 2013 through July 2015, it engaged in three trading strategies that constituted wash sales to generate fee rebates offered by the Chicago Mercantile Exchange for participation in its Eurodollar pack and bundle market maker program. (A Eurodollar pack or bundle involves the purchase or sale of a series of Eurodollar futures corresponding to a particular segment along the yield curve; click here for more background.) According to the CFTC, in one strategy, an RCCM trader determined a way to avoid the firm’s wash blocking efforts by entering orders on the opposite side of the market through two different servers. Although CME notified RCCM of the potential wash sale activity in early 2013, the Commission alleged that the firm did not institute measures to prevent the activity until later that year. In the second strategy, beginning in early 2014, two RCCM traders in different offices in different countries traded back and forth with each other, said the CFTC. This activity stopped in spring 2014, noted the Commission, after CME told RCCM that it would no longer count trades among traders at the same firm in its rebate calculation. Finally, in the third strategy, beginning in spring 2014, one RCCM trader, Brandon Elasser, placed Eurodollar pack trades known as “butterflies” on one side of the market, and similar but not identical pack spreads that contained the same component parts on the other side of the market. The CFTC claimed that Mr. Elasser entered transactions this way to take advantage of the CME Group’s matching engine that caused the component parts on each side of the market to trade opposite each other. RCCM agreed to pay a fine of US $5 million to resolve its CFTC charges. Mr. Elasser agreed to pay a fine of US $200,000 to settle separate charges filed by the Commission against him in connection with this matter.
Compliance Weeds: Under applicable law, it is prohibited for a person to enter into or offer to enter into transactions that are “commonly known” as wash sales. (Click here to access Commodity Exchange Act Sec. 4c(a)(2)(A)(i), 7 U.S.C. Sec. 6c(a)(2)(A)(i).) For the CFTC to show that a wash sale has occurred it must demonstrate that a wash result occurred (e.g., a purchase and sale of the same delivery month of the identical futures contract (or option strike price) at the same price), and that the wash result was intended. Intent can be demonstrated by specific prearrangement or inferred through conduct. CME Group arguably has a broader view of wash sales and wash trades. For CME Group, it is prohibited for a person to place or accept buy and sell orders for the same product and month (or option strike price) “where the person reasonably should know that the purpose of the orders is to avoid taking a market position exposed to market risk.” (Click here to access CME Group Rule 534 and here for the applicable CME Group Market Regulation Advisory Notice.) On CME Group exchanges, buy and sell orders for different accounts with common beneficial owners can be deemed wash sales. ICE Futures U.S. has equivalent prohibitions. (Click here to access the applicable IFUS guidance.) Firms with multiple traders that independently place orders through automated trading systems or manually may, on occasion, have offsetting trades inadvertently match. Provided such matching is de minimis, CME Group and IFUS typically will not consider such transactions as wash trades. However, firms are expected to have policies to minimize such matching. (See relevant CME Group MRAN, Q/A 13; IFUS Guidance Q/A 12.)