Bunkerbridge PTE Ltd, a non-member of the New York Mercantile Exchange, was fined US $30,000 by a NYMEX business conduct committee for engaging in a non-bona fide exchange for related position transaction on December 1, 2014, in violation of exchange rules. According to the BCC, Bunkerbridge’s EFRP was illegitimate because it failed to include the mandatory transfer of a related position. In its decision, the BCC suggested that Bunkerbridge had tried to shift the blame for its problem to a broker or futures commission merchant; however, the BCC rejected such attempted liability transfer. According to the BCC, “[i]n reaching its decision, the [BCC] Panel found that Bunkerbridge, as a party to the noted EFRP transaction, bore the responsibility to comply with Exchange Rules, including compliance with the terms of the contract and recordkeeping requirements, and such responsibility could not be deferred to a broker or [FCM].” Separately, SIG Energy LLP agreed to pay a fine of US $10,000 to resolve charges brought by ICE Futures U.S. that, one on instance, it violated spot month position limits intraday involving the Henry LD1 Fixed Price futures contract during the March 2016 expiration period.
Compliance Weeds: Both parties to an EFRP must ensure their transaction is bona fide. Most basically, one party to an EFRP must be the seller of the exchange contract and the purchaser of the related position (or long exposure associated with such position), while the other party must be the purchaser of the exchange contract and the seller of the related position (or short exposure associated with such position). Although generally there are no qualification requirements for parties to an EFRP, where the related position is a swap, each party to the EFRP must be a so-called “eligible contract participant” (click here to access Commodity Exchange Act § 1a(18) for a definition of ECP). Other requirements also apply to EFRPs. (Click here for background regarding EFRPs in the article “Alphabet Soup Under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs (EFPs, EFRs, and EOOs) Suggests Tougher Times for Traders and FCMs; Time to be Pro-Active!” in the August 6, 2013 edition of Between Bridges.) Under CME guidance, brokers or FCMs that execute or clear EFRPs for customers “are responsible for ensuring” their customers who engage in EFRPs are “fully informed regarding Exchange EFRP requirements and should “exercise due diligence in identifying circumstances” where a customer’s EFRP may be non-bona fide. (Click here to access the relevant CME Group Market Regulation Advisory Notice regarding EFRPs – Q/A25.) ICE Futures U.S. has more prescriptive requirements for firms that execute or clear EFRPs for customers. On ICE Futures U.S. such firms are expected to “establish, document and execute controls that are reasonably designed to determine a customer’s suitability to engage in EFRP transactions and detect the execution of non-bona fide EFRPs.” (Click here to access ICE Futures U.S. FAQs – Q/A8.) Any party that facilitates the execution of an EFRP that it knows is non-bona fide and fails to take “appropriate action” could be held liable under the relevant CME rule (click here to access CME Group Rule 538C – last paragraph; see also, ICE Futures U.S. FAQs – Q/A8). Under CFTC rules, all FCMs, introducing brokers and members of designated contract markets or swap execution facilities must, upon a request by DCM, SEF, the CFTC or Department of Justice, “request from its customers, and, upon receipt,” provide to the requesting entity records supporting the related position to an EFRP. (Click here to access CFTC Rule 1.35(c)(1).) Clearing firms have equivalent obligations under exchanges’ rules regarding their customers’ documents supporting EFRPs, although exchanges may call on the customers directly to provide such documents.