CME Group’s chief regulatory officer summarily suspended Hana Financial Investment’s direct and indirect access to all CME Group markets for 60 days because of its alleged incomplete cooperation with “several” investigations from May 2017 through the present. Hana is a member of the Hana Financial Group of Korea, a worldwide banking organization ranked as the 80th largest banking group based on Tier 1 capital (click here for more details).
According to CME Group, during the relevant time, the firm – apparently operating as a foreign broker with non-United States customers – provided exchange staff with “incomplete, inaccurate, false and misleading information related to account ownership, authorized traders for accounts, audit trail data, and account statements.” CME Group claimed that this prevented staff from investigating possible spoofing, disruptive trading and money pass activity.
CME Group also said that it appeared that Hana “improperly and inaccurately” netted positions among independently owned and controlled accounts within omnibus accounts at “several” CME Group clearing members, causing the clearing members to inaccurately report long and short positions and impacting open interest reporting.
Hana’s access ban will last at least through July 20, 2018, although the firm or its customers may liquidate existing positions.
Separately, a business conduct committee of the Chicago Board of Trade accepted a settlement offer from Thomas Lindstrom to be permanently barred from accessing CME Group exchanges. This settlement was in response to a finding by the BCC that, from August 1, 2014, through January 27, 2015, Mr. Lindstrom engaged in a practice of purchasing deep out of the money options on 10-year T-Note futures contracts to artificially inflate the value of his trading account at his employer, in order to hide trading losses. In January, Mr. Lindstrom pleaded guilty to criminal charges related to this matter that alleged he caused losses at his employer in excess of US $13.7 million. (Click here for details in the article “Former Options Trader Pleads Guilty to Trading Futures Options to Disguise Trading Losses and Causing Collapse of Employer” in the January 28, 2018 edition of Bridging the Week.)
Additionally, Wells Fargo Securities LLC agreed to disgorge profits of US $117,000 and pay a fine of US $70,000 to the CBOT to resolve charges that on August 25, 2015, and January 15, 2016, it pre-hedged potential block trades prior to the consummation of such transactions. At the time, pre-hedging under such circumstances was prohibited. The relevant business conduct committee also found that the firm failed to supervise the trader engaging in such activity by failing to provide sufficient relevant training.
Two traders – David Campanile and Gust Saltouros – agreed to sanctions for engaging in disruptive trading activities on the CBOT. Specifically, each was charged with entering and cancelling orders during pre-open periods without the intent to execute such transactions, solely to assess the depth of the relevant order book. Mr. Campanile agreed to pay a US $10,000 fine and serve a 20-business-day all CME Group trading prohibition, while Mr. Saltouros consented to serve a one-month trading prohibition for their purported violations. Separately, Arjun Capital Limited agreed to pay a US $20,000 fine for engaging in wash trades when one of its traders, between October 17 and 27, 2016, entered opposite side of the market orders in EU Wheat futures on the CBOT for the same firm account.
Finally, George Barker, an associated person with INTL FCStone LTD, agreed to pay a fine of US $8,500 to ICE Futures U.S. for submitting block trades later than 15 minutes after execution, contrary to requirements, and for brokering two raw sugar/refined sugar futures spreads between the identical clients, where the exchange legs immediately offset. INTL FCStone agreed to pay a fine of US $25,000 and restitution to customers of US $3,000 for failing to “timely” provide requested documents to IFUS in connection with the investigation of its employee.
Legal Weeds: Designated contract markets are required by a Commodity Futures Trading Commission core principle to have a disciplinary process that includes certain required elements that promote fairness, but may include an emergency process that permits a DCM to “impose a sanction, including suspension, or take other summary action against a person or entity subject to its jurisdiction upon a reasonable belief that such immediate action is necessary to protect the best interest of the marketplace.” (Click here to access the CFTC’s guidance regarding its Core Principle 13 for DCMs – Disciplinary Procedures.)
Pursuant to this CFTC authority, DCMs, like CME Group exchanges, have adopted rules to permit summary denial of access to exchanges’ trading facilities “upon a good faith determination that there are substantial reasons to believe that such immediate action is necessary to protect the best interests of the Exchange.” (Click here to access CME Group Rule 413.A. See also ICE Futures U.S. Rule 21.02(f); click here to access.) Under these rules, there is typically a maximum period such summary ban may remain in effect. In the interim, a respondent may request a hearing before a hearing panel.
Compliance Weeds:In late 2016, both CME Group and ICE Futures U.S. updated their block trading guidance to authorize the pre- or anticipatory hedging of futures and related options block trades by principal counterparties prior to a transaction’s execution under limited circumstances. Qualified parties to a block trade (e.g., not persons initially acting as agents taking the opposite side of customer orders) may now “engage in transactions to hedge positions which they believe in good faith will result from the consummation of the block trade which is under negotiation.” (Click here to access the relevant CME Group MRAN – Q/A 11, and here for the applicable IFUS FAQs – Q/A 24. Click here for more 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.)