The Commodity Futures Trading Commission and the Commodity Exchange, Inc. brought and resolved charges against Arab Global Commodities DMCC for alleged spoofing-type trading by one of the firm’s unnamed traders in 2016.

According to the CFTC, from at least March through August 2016, a trader for AGC – a Dubai-based broker and trading firm – on multiple occasions placed orders involving COMEX-traded copper futures that involved the same pattern: placement of a small lot order on one side of the market typically one or two levels away from best bid or offer; placement of a series of larger orders on the other side of the market with an alleged intent to cancel; and cancellation of the larger orders following execution of the smaller order in whole or part. On occasion, said the CFTC, the trader used another AGC trader’s account to disguise his activity.

The CFTC claimed that AGC did not have an anti-spoofing policy; did not train its traders or managers regarding US prohibitions against spoofing; did not monitor for spoofing; and did not detect its trader’s purported spoofing. Moreover, charged the CFTC, even after AGC’s futures commission merchant alerted one branch of the firm to its suspicions regarding the trader’s conduct, there was no internal elevation of the issue to more senior managers within AGC. Only after CME Group indicated it was investigating the trader did AGC review the individual’s conduct and “promptly” terminate him, said the Commission.

To resolve this matter, AGC agreed to pay to the CFTC a fine of US $300,000. The CFTC acknowledged the firm’s assistance; early stage resolution; and remedial measures to deter similar conduct in the future in accepting AGC’s offer of settlement.

In addition to charging AGC with a violation of its prohibition against disruptive practices, COMEX also charged the firm with a violation of its duty to supervise. COMEX said that AGC’s failure to provide its traders with “sufficient training regarding Exchange rules,” as well as to monitor its employees’ trading for potential violations, was the basis for this charge. AGC agreed to pay an additional US $70,000 to resolve the COMEX disciplinary action.

The relevant individual was not charged by either the CFTC or COMEX. AGC is formally organized as a free zone company registered with the Dubai Multi Commodities Center and regulated by the Emirates Securities and Commodities Authority.

Legal Weeds: The obligation of persons to supervise their employees under CFTC rules only applies to registrants (click here to access CFTC Rule 166.3). The obligation to supervise employees and agents under COMEX rules applies to any person who trades on the exchange – whether they are members or not. AGC was a not a COMEX member. (click here to access New York Mercantile Exchange Rule 432.W).

Compliance Weeds: Although these two actions against AGC break no new ground regarding the CFTC’s or CME Group’s view regarding spoofing, they do provide clear articulation by the regulators of at least some elements of what they expect as the components of effective compliance program regarding disruptive trading: (1) a written policy prohibiting spoofing; (2) training; (3) monitoring tools and monitoring; and (4) follow-up on red-flags emanating from such monitoring or otherwise. Moreover, potential violations are expected to be elevated within a company and appropriate action taken.

Last year, CME Group exchanges brought and settled disciplinary actions against Geneva Trading USA, LLC and two of its employees – Krzysztof Marzec and Robert Kimmons – for engaging in alleged spoofing-type activities on the New York Mercantile Exchange, Inc. and the Commodity Exchange, Inc. from March 2013 through July 2013. To resolve the matter, Geneva Trading agreed to disgorge aggregated COMEX and NYMEX trading profits of US $91,241. For the actions of its two traders, Geneva Trading was charged by the CME Group exchanges with violating just and equitable principles of trades and related violations, but solely on a strict liability basis. The firm was not charged with failure to supervise, and it was not assessed a fine. The CME Group exchanges implied that no fine was assessed because the firm had and enforced robust policies and procedures regarding the purported wrongful conduct of its employees. (Click here for background in the article “CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits” in the October 9, 2016 edition of Bridging the Week.)