ICE Futures U.S. settled two related disciplinary actions against three persons for alleged violations of its block trading and other rules for an aggregate fine of $325,000. However, both disciplinary actions referenced the central actions of an unnamed introducing broker that was not named in either matter or in a separate matter; presumably a disciplinary action against such IB may be pending.

In one disciplinary action, Calgary, Canada-based AC Power Financial Corporation and Jason Vaccaro, the firm’s president, agreed to pay a combined fine of US $225,000 and to each serve 30-day suspensions from trading all IFUS energy markets products for purported violations of the exchange’s block trading rule. According to IFUS, at various times from August 2013 through July 2014, “Vaccaro received from his Introducing Broker and may have used nonpublic information concerning the identity or trade activity of the Introducing Broker’s customers” in connection with various of the customers’ block trades. However, said IFUS, this sharing of information appeared unrelated to any negotiation of a block trade between Vaccaro and such customers and thus was prohibited by IFUS requirements (click here to access IFUS Block Trade FAQ, Question/Answer 22). Moreover, when it executed block trades, alleged IFUS, AC Power may not have been an eligible contract participant as required (click here to access IFUS Rule 4.07(a)(i)).

Separately, Susquehanna Energy Partners ("SEP") agreed to pay a fine of US $100,000 and disgorgement of approximately US $49,000 for purportedly placing a verbal standing order with the same unnamed introducing broker that resulted in block trades being allocated to SEP after the fact, rather than placing individual orders for each block trade. This, charged IFUS, potentially violated its requirement that every order underlying a block trade explicitly state that it is or may be executed by a block trade (click here to access IFUS Rule 4.07(a)(ii)(A)). According to IFUS, SEP’s allegedly wrongful conduct occurred from August 2013 through July 2014.

SEP was also charged with failing to diligently supervise its employee who caused the firm’s purported violations.

AC Power, Mr. Vaccaro and SEP all agreed to resolve their IFUS charges without admitting or denying any rule violation.

In December 2014, Mr. Vaccaro consented to settle an enforcement action against him by the Federal Energy Regulatory Commission related to trading on behalf of his then employer, Twin Cities Power – Canada Unlimited ("TCP"). FERC alleged that TCP, TCP's parent company during the relevant time, Mr. Vaccaro and two other TCP traders scheduled and traded physical electric power flows out of certain markets in ways to benefit related swap positions based on such markets’ real-time prices. Mr. Vaccaro agreed to resolve his FERC action, without admitting or denying any violations, by payment of a fine of US $400,000 and a five-year ban on scheduling or trading physical electric power at wholesale in interstate commerce. (Click here for details regarding the FERC disciplinary action.)

Unrelatedly, the Chicago Board of Trade resolved separate disciplinary actions against three persons for alleged violations of its rules regarding exchange for related positions, reporting of long positions eligible for delivery and wash trades.

In one action, Li Jia Ning, a nonmember, agreed to a six-month trading prohibition of all CME Group products for entering into multiple matching buy and sell orders for a single account owned by his employer from January 2015 and May 2015 involving Soybean Futures contracts. This activity resulted in self-match of 21,434 Soybean Futures contracts.

Moreover, charged CBOT, Mr. Ning allegedly utilized another trader’s Tag 50 identification to enter orders onto Globex, as opposed to his own.

In another action, Cunningham Commodities Ltd, a CBOT member firm, consented to pay a fine of US $50,000. CBOT claimed that, on three occasions in November 2015, Cunningham failed to accurately report its long position for delivery in the expiring month Rough Rice futures contract. This failure, said CBOT, resulted in incorrect delivery assignments in the relevant futures contract.

And in the third action, GAM International Management Limited, also a CBOT member, agreed to pay a fine of US $25,000 for engaging in two EFRP transactions involving 10-Year US Treasury Note Futures that were purportedly impermissibly contingent on each other for the purpose of offsetting the related position without incurring “material market risk.” Moreover, said CBOT, the quantity of the related position was not approximately equal to the futures component of the EFRP.

Compliance Weeds: Block trades are an approved limited exception to the Commodity Futures Trading Commission’s requirement that all futures contracts be executed openly and competitively unless they are executed noncompetitively “in accordance with the written rules of [a] contract market that have been submitted to and approved by the Commission, specifically providing for the noncompetitive execution of such transactions.” (Click here to access CFTC Rule 1.38.) As a result, to avoid violation of this CFTC rule, persons engaging in block trades must strictly comply with relevant exchange requirements.

The IFUS rule that authorizes block trades has strict requirements. Among them are that (1) the parties are so-called “eligible contract participants” as defined under applicable law (click here to access the Commodity Exchange Act, §1a(12); (2) each buy and sell order state “explicitly” that it is to be, or may be, executed through a block trade; and (3) block trades must be: at least for the applicable minimum quantity (with special rules for investment managers); privately negotiated; executed at a fair and reasonable price in light of the quantity; and reported within such time and in such manner as required by the exchange.

Information regarding a block trade constitutes proprietary, nonpublic information. As a result, it is prohibited for any person to front-run a block trade when acting on such information regarding an impending transaction by another person acquired through a confidential employer/employee relationship, a broker/customer relationship or in breach of some other preexisting duty.

To effectuate a block trade, a broker may disclose to a potential counterparty a customer’s identity and other material information but only with the customer’s consent. A broker may not, however, ever disclose the terms of a completed or pending block trade to a non-involved party prior to the consummated block trade being publicly reported.

Pre-hedging or anticipatory hedging of block trades is now permitted by persons who are not intermediaries taking the opposite side of a customer order, subject to strict conditions. (Click here for background in the article “Pre-Hedging by Principals Authorized in Block Trade Clarification Implemented by IFUS and Adopted by CME Group” in the October 30, 2016 edition of Bridging the Week. Click here for further background in a publication associated with a November 21, 2016 FIA webinar entitled “Exchange Amendments to Block Trade Pre-Hedging Rules.”)

Other designated contract markets have equivalent rules but there may be discrete differences. (Click here, for example, to access CME Group Rule 526.)