A Chicago Board of Trade and a Chicago Mercantile Exchange member each agreed to settle disciplinary actions charging that they entered into exchange for related position transactions that were transitory in nature, and thus prohibited. In one action, Alphadyne Asset Management, LP, a CBOT member, agreed to pay a fine of US $65,000 to resolve charges that, on November 3, 2015, and March 1, 2016, the firm entered into EFRP transactions involving US Treasury futures to rebalance positions held by various Alphadyne funds that were contingent upon the execution of other EFRP transactions. CBOT claimed these transactions were executed without incurring market risk. Unrelatedly, Barclays Bank PLC agreed to pay a fine of US $15,000 to settle CME charges that it also engaged in a transitory EFRP on April 5, 2016. According to CME, the bank sold E-mini S&P 500 futures and bought SPDR S&P exchange traded fund (SPY) contracts while simultaneously selling the SPY contracts and buying S&P 500 Index option combos against the identical counterparty. CME claimed the SPY contracts were entered into and liquidated without Barclays incurring market risk. Separately, Yakun Popli, a nonmember agreed to pay a fine of US $15,000 and be suspended from all access to CME Group trading for 10 business days for placing orders during the pre-open on one or more occasions from January 30 through October 28, 2014, that were not made in “good faith.” CME claimed these orders were not placed for the purpose of executing bona fide transactions and thus constituted a disruptive practice. INTL FC Stone Markets LLC consented to pay a fine of US $20,000 and disgorge profits of over US $9,000 for violating position limits in corn futures during one day in 2016.
Compliance Weeds: CME Group exchanges do not permit transitory EFRPs for any purpose. (Click here to access CME Group Rule 538.C.) CME Group says that an EFRP is transitory when the execution of an EFPR is contingent upon the execution of another EFRP or related position transaction between the same parties and the related positions are offset “without the incurrence of market risk that is material in the context of the transaction.” (Click here to access CME Group MRAN RA1707-5 (July 17, 2017).) CME Group will also regard an EFRP as transitory if two EFRPs involving economically equivalent futures positions traded on a CME Group and another exchange result in the related position component being offset between the same parties. Structuring a swap so that it settles through an Exchange for Risk Transaction is not considered to be entering into a transitory EFRP provided the settlement value (floating price) is subject to material market risk. Immediately offsetting exchange of futures for physical positions involving foreign currency positions are also not considered transitory EFRPs if executed in accordance with CME Group rule. (Click here to access CME Group Rule 538.K; see also MRAN Q/A 26.) ICE Futures U.S. has equivalent prohibitions, although it also permits immediately offsetting EFP transactions involving physical delivery obligations by participants in the London Gold Auction administered by the ICE Benchmark Administration. (Click here to access ICE Futures U.S. FAQs – January 30, 2017, Q/A22.)