Bridging the Week by Gary DeWaal: December 14 - 18 and 21, 2015 (EFRPs; Wash Sales; Manipulation; Margin; Conflicts of Interest; Fingerprinting; Audit Trail)

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Published Date: December 20, 2015

The Commodity Futures Trading Commission issued a host of year-end final and proposed rules, including a final rule on uncleared margin for swaps and proposed rules aimed at enhancing cybersecurity at designated contract markets, swap execution facilities, derivatives clearing organizations and swap data repositories. Separately, CME Group and ICE Futures U.S. publicized multiple disciplinary actions touching upon a myriad of alleged rule violations—from improper exchange for related position transactions, forbidden pre-hedging of block trades, a position limit violation, wash sales and various other trade practice violations. As a result, the following matters are covered in this week’s edition of Bridging the Week – the last edition for 2015:

Video Version:

Article Version:

Bah Humbug—CME Group Fines Firms for Inadequate Documentation of EFRPs; Additional Firms Cited for Pre-Hedging Block Trades and Other Violations by CME Group and IFUS

Chicago Mercantile Exchange Group exchanges and ICE Futures U.S. brought and, in all but one case, voluntary settled 19 disciplinary actions charging a myriad of alleged rule violations—from improper exchange for related position transactions, forbidden pre-hedging of block trades, a position limit violation, wash sales and various other trade practice violations.

The Chicago Mercantile Exchange charged five firms with engaging in so-called “transitory” exchange for related position transactions involving foreign exchange products. CME claimed that none of the firms’ transactions included documentation of the corresponding cash positions and thus were not “bona fide.” The firms included three non-CME member firms—FTC Capital, GMBH, Jamison Capital Partners LP, and TMS Capital Ltd.—and two member firms—Macquarie Equities Ltd. and Newedge USA, LLC. Newedge and TMS were each subject to two disciplinary actions. Fines for the seven disciplinary actions—which were all voluntarily settled—ranged from US $7,500 to US $60,000.

Similarly, the New York Mercantile Exchange charged four firms with engaging in EFRP transactions without a transfer of ownership of the cash commodity underlying the exchange contract, a related product or an over-the-counter instrument. Because there was no such transfer, the EFRP transactions were not “bona-fide” said NYMEX. All four firms—GDF Suez Trading, MCE Ltd, Petco Trading Labuan Co. Ltd., and Sinopec (Hong Kong) Petroleum Company Limited, were non-members. To resolve these matters, the firms agreed to pay fines from US $15,000 to US $30,000.

Two firms—NIC Holding Corp., a NYMEX member firm, and Standard Americas Inc., a Commodity Exchange, Inc. non-member—were charged by CME Group exchanges with pre-hedging block trades after receiving solicitations for such trades, but before consummation. As a result, claimed the exchanges, the firms were able to lock in profits. To resolve these matters, each firm agreed to disgorge its profit on the relevant transactions and pay a separate fine. NIC consented to pay a fine of US $75,000 and disgorge profits of $114,060, while Standard Americas agreed to pay a fine US $175,000and disgorge profits of US $65,320. [Corrected December 22, 2015.]

Separately BTG Pactual Commodities (US) LLC, a NYMEX non-member, agreed to pay a fine of US $15,000 and disgorge profits of almost $65,000 to resolve NYMEX charges related to its alleged violation of a spot month position limit for a limited period on one day. Three COMEX non-members agreed to pay an aggregate fine of US $70,000 for engaging in a series of wash trades on two days in 2014 between accounts with the same beneficial owner. The non-members were Li Ji Liang, Guanchao Pang and Wellca International Trading Limited.

Fusion Asset Management LLP resolved charges brought by ICE Futures U.S. that its employees traded funds they managed opposite each other allegedly to move positions from one fund to another without using the exchange’s crossing functionality. IFUS acknowledged that “[n]o harm to any customer was…alleged [o]r proven.” Fusion agreed to pay a fine of US $50,000 to resolve this matter.

Finally, an IFUS hearing panel entered a default judgment against Jude Sullivan. The exchange claimed that Mr. Sullivan, Mark Porter and Kevin Wicinski, all former floor brokers, may have violated exchange rules when Mr. Sullivan, between March and July 2011, withheld customer orders and engaged in several non-competitive transactions opposite Mr. Porter and Mr. Wicinski at favorable prices to them. The panel ordered Mr. Sullivan to pay restitution to the harmed customers of almost US $46,000 and banned him from trading IFUS products for two years. Mr. Wicinski and Mr. Sullivan agreed to resolve charges against them for IFUS trading bans of eight months and 12 months, respectively.

Compliance Weeds:


A transitory exchange for related position is one where the execution of the EFRP is contingent—either by express agreement or otherwise—upon the execution of another EFRP or related position transaction, and where the combined transactions result in the offset of the related position without the parties incurring market risk. Prior to August 4, 2014, most transitory EFRPs on all CME Group exchanges were prohibited. However, there were exceptions for EFRPs involving foreign currency, metals and energy products. Beginning August 4, 2014, transitory EFPRs involving these products also were prohibited. However, “immediately offsetting” exchange for physical transactions (a type of EFRP transaction) were authorized for foreign currency, but:

the Exchange would expect to see confirmation statements issued by the bank/foreign exchange dealer party to the Transaction. These confirmation statements should be the type normally produced by the bank/foreign exchange dealer for confirmation of currency deals and should indicate, by name, the identity of the counter party principal to the Transaction.

CME Group explained that, immediately offsetting EFP transactions were not transitory because,

the offsetting physical transaction is not contingent on the EFP in any way. If, for example, the futures leg of an immediately offsetting EFP in foreign currency is not accepted for clearing, the futures transaction is void ab initio and the counterparties would be left with the stand-alone physical transaction.              

(Click here for relevant CME Group advisory notice regarding EFRPs, including “immediately offsetting” EFPs. This MRAN includes CME Group Rule 538K.)

IFUS also permits immediately offsetting EFP transactions in foreign currency futures. (Click here for relevant IFUS FAQs regarding such transactions.)

Immediately offsetting EFPs are only available for foreign currency products on CME Group and IFUS.

Practically speaking, immediately offsetting EFP transactions involving foreign currency products achieve the same result as what were formerly transitory EFP transactions. However, documentation requirements are likely more complex for some traders, particularly involving managed accounts. (Click here to access a related article, “Lord Voldemort Hovers Over the Futures Industry: CME Prohibits All Transitory Exchange of Futures for Related Positions by Name” in the April 14, 2014 edition of Between Bridges.)

It is critical for parties always to ensure there is proof and/or relevant documents to support the related position component of any EFRP no matter what product. Relevant documents must be saved for at least five years.

Block Trades:

Once a party is solicited for a block trade, it cannot disclose the details of the solicitation to any other party except to facilitate the execution of the block trade. This ban is in effect until a public report of the block trade is made by the exchange. 

Moreover, pre-hedging, anticipatory hedging or trading ahead of any portion of a block trade in the same product or a closely related product is prohibited following solicitation to participate in such transaction. Counterparties to the block trade, however, may initiate trades to hedge or offset the risk of a block trade as soon as they execute the trade, even before the public report of the trade by the exchange. A closely related product is one that is highly correlated, serves as a substitute for, or is the economic equivalent of the product subject to the block transaction. 

(Click here to access the relevant CME Group Rule 526 and here to access the related advisory notice regarding block trades.)


Compliance Weeds: All National Futures Association members must adopt and enforce written policies regarding cybersecurity by March 1, 2016. Under the NFA’s recently published NFA’s Interpretive Notice on Information Systems Security Programs, NFA members must institute formal, written information systems security programs (ISSP). Although the NFA makes clear that its “policy is not to establish specific technology requirements,” it will require all relevant members to have supervisory procedures that are “reasonably designed to diligently supervise the risks of unauthorized access to or attack of their information technology systems, and to respond appropriately should unauthorized access or attack occur.” NFA members should be, by now, conducting a gap analysis between NFA’s recommendations and their current practices, and to try to begin to close any gap by drafting and implementing enhanced provisions to their ISSPs as necessary. (Click here for details regarding NFA’s Interpretive Notice in the article, “NFA Proposes Cybersecurity Guidance” in the September 13, 2015 edition of Bridging the Week. Click here to access an overview of the financial services industry’s regulatory landscape regarding cybersecurity, and a helpful checklist to assist in developing an ISSP, in the article “Cyber-Attacks: Threats, Regulatory Reaction and Practical Proactive Measures to Help Avoid Risks” in a June 24, 2015 Financial Services Advisory by Katten Muchin Rosenman LLP.)

My View: The artful wording of this new sentence seems to imply the CFTC may believe that clearing member FCMs have an obligation to retain electronic audit trails they otherwise are not required to keep under the applicable exchange rule—a trick even the great Harry Houdini likely could not master! A few weeks ago the CFTC published a comprehensive set of proposed rules governing algorithmic trading that, if adopted, would increase recordkeeping requirements on algorithmic traders and clearing member FCMs handling their accounts. (Click here to access the article, “CFTC’s Proposed New Algorithmic Trading Rules Augur Potential Increased Obligations and Costs, and a New Registration Requirement” in the November 29, 2015 edition of Between Bridges.)

Compliance Weeds: Swaps dealers and major swap participants should be routinely monitoring the accuracy and timeliness of their data reporting. Staff’s warning at the end of their advisory is not just ominous sounding: “This advisory should not be construed in any way as excusing past violations or limiting the CFTC’s ability to pursue any actions for reporting violations.” Recently, the CFTC filed and settled charges brought against Deutsche Bank AG, a provisionally registered swap dealer, for alleged reporting errors in connection with its swaps reporting. Deutsche Bank agreed to pay a fine of US $2.5 million and to enhance controls around its swaps reporting to resolve this matter. (Click here for more information in the article, “Swaps Dealer Agrees to US $2.5 Million Fine to Resolve Charges by CFTC That It Misreported Certain Swap Transactions” in the October 4, 2015 edition of Bridging the Week.)

And more briefly:

Compliance Weeds: Even though single name credit default swaps are securities under applicable law, they are most likely going to have to be cleared in a futures environment for some time. Only the Commodity Futures Trading Commission has set up a practical regime for the handling of such products—utilizing a cleared swaps account—subject to ordinary CFTC protections. (Click here to access January 14, 2013 order regarding the treatment of funds held in connection with CDS cleared by ICE Clear Credit.)

My View: CME Group’s requirement is similar to a standard securities industry requirement set forth in Rule 3220 of the Financial Industry Regulatory Authority (click here to access). Two years ago, FINRA sought comments on this rule to assess its continued relevance. FINRA subsequently issued a report confirming its ongoing usefulness, but acknowledged that the $100 threshold was likely antiquated since it was first adopted last century, in 1992 (click here to access the report). However nothing has changed yet either regarding the FINRA rule or the relevant CME rule. Even the Board of Governors of the Federal Reserve System finally increased its benchmark interest rate last week!

For more information, see:

Bah Humbug— CME Group Fines Firms for Inadequate Documentation of EFRPs; Additional Firms Cited for Pre-Hedging Block Trades and Other Violations by CME Group and IFUS:

CME Group:
BTG Pactual:
FTC Capital:
GDF Suez:
Jamison Capital:
Li Ji Liang:
NIC Holding:
Guanchao Pang:
Petco Trading:
Standard Americas:

TMS Capital:
Wellca International:

ICE Futures U.S.:
Fusion Asset Management:

Sullivan, Wicinski and Porter:

Bank Sanctioned US $307 Million by CFTC and SEC for Alleged Conflicts of Interest in Investing Clients’ Funds:


Broker-Dealer Fined US $1.25 Million for Not Fingerprinting Non-Registered Employees:

CFTC Proposes Enhanced Cybersecurity Rules For Exchanges, Clearing Houses, and Data Repositories:

CFTC Lowers Record-Keeping Burden on End Users:

CME Group Amends Clearing Member Audit Trail Retention Requirements for Direct Access Clients—or Does It?:

ESMA Consults on CCPs’ Margin Requirements for Client Accounts:

FCA Consults on Roll-Out of MiFID II in UK:

Global Food Merchants' Motion to Dismiss CFTC’s Enforcement Action for Alleged Manipulation Denied:

Swap Dealers and MSPs Reminded by CFTC Staff to Report Uncleared Swaps Timely and Accurately—or Else:

Swap Dealers Given Initial Margin Requirement Break for Intra-Affiliate Transactions Under CFTC Final Margin Rule:

Swiss Regulator Bans Six Managers and Traders for Employer’s Market Infractions in Foreign Exchange and Precious Metals Trading:

‘Tis the Season to Be Jolly—But Not Too Jolly Says the CME Group:

25 Investment Management Firms Promise to Clear Single-Name Credit Default Swaps:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of December 19, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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