CME Group exchanges brought and settled disciplinary actions alleging wash sales, spoofing and impermissible exchange for related position transactions.
In two disciplinary actions – one involving Image Securities and the other its employee Ramakant Gaund – the Chicago Mercantile Exchange alleged that, from December 1, 2014, through March 31, 2015, the firm, through its employee, engaged in multiple matching buy and sell orders to move positions between different accounts of the firm to “manage” margin calls. The exchange charged that these transactions constituted impermissible wash trades. To resolve these matters, Image agreed to pay a fine of US $85,000 while Mr. Gaund consented to pay a fine of US $10,000 and be subject to a five-business day all CME Group exchanges trading suspension. CME claimed that Image failed to supervise its employee. The exchange also charged Image with permitting one employee to enter trades on its Globex trading platform using a different employee’s Tag 50 user ID. Both Image and Mr. Gaund were nonmembers.
Robert Overholt agreed to pay a fine of US $25,000 and serve a 30-day all CME Group exchanges trading suspension for allegedly entering orders involving Live Cattle futures contracts without intent to execute the orders. This conduct purportedly occurred on “multiple occasions” from October 12, 2015, through December 8, 2015. Typically, said CME, Mr. Overholt would place a large order on one side of the market to induce execution of a small order on the other side, and then cancel the large order after the small order was executed. The exchange claimed that the orders placed without an intent for execution constituted a violation of its disruptive practices rule (click here to access CME Group Rule 575.A).
Finally, Citigroup Global Australia, Pty LTD and AMP Capital Investors Limited – in two separate disciplinary actions – agreed to resolve allegations by the Chicago Board of Trade that on April 15, 2015, the firms executed two EFRP transactions “that were contingent upon each other, wherein each position was established and offset without the incurrence of material market risk.” Each firm agreed to pay a fine of US $15,000 to resolve their disciplinary action. Transitory EFRPs (including contingent EFRPs) are not authorized under CME Group guidance (click here to access CME MRAN RA1716-5 (October 18, 2017), Q/A 13).
Compliance Weeds: Under applicable law, a person is prohibited from entering into or offering 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 USC 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, a person is forbidden 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 manually or through automated trading systems 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.)