Four companies settled disciplinary actions brought by the Chicago Board of Trade and ICE Futures U.S. alleging that they engaged in wash sales. In each action, the relevant exchange alleged that the respondent engaged in transactions solely for the purpose of transferring positions between two related accounts. Bank of America Corporation agreed to pay a fine of US $30,000 to the Chicago Board of Trade to resolve charges that on June 2, 2015, it engaged in two exchange for related position transactions between accounts of two of the firms’ wholly owned subsidiaries solely to transfer Federal Funds Futures positions between them. Similarly, Gold-Eagle Corporation consented to a sanction of US $25,000 by the CBOT to settle charges that it engaged in one EFRP transaction on January 4, 2016, to transfer corn futures between two accounts it owned and controlled. CBOT also alleged that both BOA and Gold-Eagle engaged in the problematic EFRPs without the exchange of a related cash position, making the EFRPs non-bona fide. Similarly, Sucres et Denrees S.A. and Sucden Geneva S.A. each were ordered to pay a fine of US $25,000 to ICE Futures U.S. when a business conduct committee determined that, on 16 instances on two days in February 2015, the affiliated firms traded opposite each other to transfer positions in Sugar No 11. futures. Separately, Sierentz Fund LP agreed to pay a fine of US $10,000 and disgorge profits of US $78,847.50 to ICE Futures U.S. to settle charges that it “inadvertently” held an intraday position in the Henry LD1 Fixed Price Future higher than the applicable spot month position limit during the July 2016 settlement period, while PetroChina International (America), Inc. consented to a sanction of US $50,465 by ICE Futures U.S., including disgorgement of profits of US $2,965, for alleged multiple violations of spot month position limits. Finally, Daniel Pires, a non-member, agreed to remit US $20,000 to CBOT to resolve charges that, between March and June 2015, he entered multiple user-defined 10-Year U.S. T-Note covered option spread orders that allegedly were intended to obtain more favorable prices for his options instruments than were available in the outright market. CBOT alleged that this practice constituted disruptive trading.
Compliance Weeds: There are two important takeaways from these series of exchanges’ regulatory actions. First, position limits are 24/7 (Click here to access ICE Futures US Rule 6.20(b), for example.) Both enforcement actions by ICE Futures U.S. alleging violations of position limits related to purported intraday violations. Trading firms should monitor their position limit compliance not just at the end of each trading day but intraday too. This can be particularly challenging when multiple accounts of different affiliates or even trading desks within a single entity must be aggregated to assess overall positions, but it is important. Second, entering a user-defined spread for the purpose of disadvantaging other market participants can be a violation of general prohibitions against market disruption. (Click here to access CME Group Rule 575D; click here to access the CME Group MRAN regarding disruptive practices, Q/A 22.) In the CBOT disciplinary action against Mr. Pires, the exchange claimed that the respondent entered a user-defined covered option spread with the intent to avoid allocation of futures contracts that should have been tied to the covered options instruments. He did this, said CBOT, in order to obtain more favorable prices for the options instruments than were available in the marketplace. Even though CME Group’s Globex System utilizes reasonability checks aimed to prevent this conduct from occurring, its system is not infallible