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Volume XI, Number 175


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Bridging the Week: October 3 to 7 and October 10, 2016 (Strict Liability; EFRPs; Block Trades; Inflated AUM) [VIDEO]

The CME Group settled disciplinary actions against a trading firm solely on the basis of its strict liability under applicable exchange rules for the acts of two of its employees. Meanwhile, ICE Futures U.S. proposed amended guidance to authorize the settlement of certain forward contracts and swaps through exchange for related position transactions, and revised previously proposed amended guidance related to pre-hedging of block trades. As a result, the following matters are covered in this week’s edition of Bridging the Week:

  • CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits (includes Compliance Weeds);

  • ICE Futures U.S. Proposes to Authorize Settlement of Certain Forward Contracts and Swaps through EFRPs (includes Compliance Weeds);

  • Pre-Hedging of Block Traders Permitted by Principals to Block Trades Prior to Trade Finalization Under Ice Futures U.S. Proposed Guidance Clarification (includes Compliance Weeds);

  • Bank Settles with SEC For Alleged Overstatements of Assets Under Management to Attract New Business; and more.

CME Group Settles With Trading Firm for Spoofing-Type Offenses, Holding It Strictly Liable for Acts of Agents; Orders Disgorgement of Profits

CME Group 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. Geneva Trading is both a COMEX and NYMEX member.

According to CME Group, during this time, both Mr. Marzec and Mr. Kimmons on NYMEX, and Mr. Marzec alone on COMEX, purportedly engaged in a “pattern of activity” where they entered large-sized orders for futures contracts on one side of the market, and cancelled them “several seconds” after smaller-sized orders they placed on the other side of the market were executed. CME Group claimed that these individuals placed their larger orders to induce other market participants to trade opposite their smaller orders. To resolve his COMEX and NYMEX charges, Mr. Marzec agreed to pay aggregate fines of US $90,000 and to serve a 20 business day all CME Group exchanges access suspension; while Mr. Kimmons agreed to pay a US $60,000 fine and serve a 10 business day all CME Group exchanges access suspension to resolve his NYMEX charges. Both individuals were charged by CME Group with violating just and equitable principles of trade and related provisions. (Click here to access CME Group Rules 432 B.2., Q and T.)

Geneva Trading was also charged with violating just and equitable principles of trades and related violations, but solely on a strict liability basis for the actions of its two traders. To resolve the CME Group disciplinary actions against it, Geneva Trading agreed to disgorge aggregated COMEX and NYMEX trading profits of US $91,241.

Unrelated, Manoj Jindal, a nonmember of the Chicago Board of Trade, agreed to pay a fine of US $75,000 and serve a 30-day all CME Group exchanges access suspension for allegedly engaging in spoofing-type transactions on “certain days” during July through November 2013.

In addition, Larry Johnson, a nonmember of the Chicago Mercantile Exchange, was charged with engaging in three wash trade transactions and initially misallocating certain trades during December 2013 and January 2014 to avoid maintenance margin requirements. He settled his CME charges by agreeing to pay a fine of US $35,000 and serving a five-day all CME Group exchanges access suspension.

Finally, two nonmember firms, Aspire Commodities LP and Goldman Sachs Asset Management, resolved charges that they violated exchange-set position limits. Aspire agreed to pay a fine of US $35,000 to resolve its disciplinary action, while GSAM agreed to pay a sanction of US $40,000.

Compliance Weeds: The disciplinary actions against Geneva Trading marked the first time CME Group has ordered disgorgement of profits based on strict liability.

For purposes of the applicable CME Group rule dealing with strict liability, “the act, omission or failure of any official, agent, or other person acting for any party within the scope of his employment or office shall be deemed the act, omission or failure of the party.” (Click here to access the full text of CME Group Rule 433.)

In a Market Regulation Advisory Notice entitled Supervisory Obligations for Employees (click here to access MRAN RA1517-5), CME Group notes that, under one of its rules, “it is an offense for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the CME Group Exchanges” (Click here to access CME Group Rule 432.W.) Importantly, in this MRAN, CME Group makes clear that agents include not only natural persons, but “any automated trading systems … operated by any party.”

However, in the same MRAN, CME Group suggests that for purposes of its strict liability rule – the same rule relied on in the Geneva Trading disciplinary actions – “agent” may also include an ATS. Under CME Group interpretation, ATSs include a computer system that generates and/or routes messages without human intervention – ATSs are not just black boxes! (Click here to access CME Group MRAN RA1610-5 – CME Globex Tag 50 ID Requirements.)

Member and nonmember firms using proprietarily developed or third-party ATSs must be aware of these CME Group regulatory provisions and guidance should an ATS they use malfunction and disrupt the marketplace. Moreover, they should consider what steps they might take in advance to minimize the likelihood of a potential problem given CME Group’s apparent views.


  • ICE Futures U.S. Proposes to Authorize Settlement of Certain Forward Contracts and Swaps Through EFRPs: ICE Futures U.S. proposed to amend its guidance regarding exchange for related position transactions to make clear that swaps that will settle or forward contracts that may settle through EFRPs will not be considered to be part of prohibited transitory EFRP arrangements where the swap or forward contract is “subject to market risk that is material in the context of the transaction.” For example, said IFUS, under its new guidance parties could agreed to enter into an OTC transaction that settled through an exchange for swaps on a specific future date that referenced a specific futures contract settlement price on a specific date or on the average prices of a specific futures contract over a defined period. Likewise, a forward contract could be entered into that calls for delivery “of a carbon emission certificate [that] may be priced at a premium or discount to a subsequent state/government auction price and may include an option to settle the delivery obligation by executing an [exchange for physical] after the auction price is determined.” Because, in both examples, the initial related position transaction was subject to “material market risk” the agreement to settle the transaction later through an EFRP “would not render the [EFRP] transitory,” said IFUS. IFUS submitted its proposed guidance to the Commodity Futures Trading Commission on October 4.

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. All transitory EFRPs are currently prohibited by both CME Group and IFUS, and other designated contract markets. However, “immediately offsetting” exchange for physical transactions are authorized for foreign currency, subject to strict conditions that have been modified over time. CME Group and IFUS both have observed that, in connection with an immediately offsetting foreign currency EFP, the offsetting physical transaction is not contingent on the EFP in any way. IFUS’s current proposal carves out from the prohibition against transitory EFRPs certain transactions where an offset to the related position is contemplated by the parties at the time an initial transaction is entered into, but where the parties incur market risk on the initial related position.

  • Pre-Hedging of Block Traders Permitted by Principals to Block Trades Prior to Trade Finalization Under Ice Futures U.S. Proposed Guidance Clarification: ICE Futures U.S. slightly revised a proposed guidance regarding block trades that it previously submitted to the Commodity Futures Trading Commission in June 2016 that would permit certain pre- or anticipatory hedging by a counterparty prior to a block transaction being formally executed. Under IFUS’s proposed guidance, the principal parties to a proposed block trade may engage in pre- or anticipatory hedging of the position they believe in “good faith” would result from the “consummation” of a block trade. However, this ability would not exist for “an intermediary that takes the opposite side of its own Customer order.” As proposed, an intermediary would be permitted to enter into transactions to offset the position that will result from the block trade only after the block trade has been finalized. IFUS’s proposed amendments to its initial CFTC submission seemed to constitute mostly non-substantive wordsmithing; however, the exchange expressly clarified that its proposed guidance would not affect any requirement under applicable law or regulation of the Commodity Futures Trading Commission. IFUS submitted its proposed revised guidance to the CFTC for its approval on October 4.

Compliance Weeds: Block trades are an exception to the CFTC’s requirement that all futures contracts be executed on a designated contract market. Block trades may be executed off the marketplace by eligible contract participants subject to CFTC-approved DCM rules. These rules typically state which DCM products are subject to block trades (and during which times); minimum thresholds; and reporting requirements. The rules also typically address the use of nonpublic information regarding block trades. Currently, all DCMs prohibit pre-hedging or anticipatory hedging of any portion of a block trade in the same or related product by all parties to an impending block trade. However, typically, parties to a block trade may hedge or offset the risk associated with a block trade following its execution, but prior to when the transaction is reported publicly by the exchange. Under IFUS’s proposed interpretation, parties to a block trade – but not intermediaries acting for customers – would also be permitted to hedge or offset the risk associated with a block trade prior to execution that they believed would result from consummation of the block trade. Third parties on both exchanges are prohibited from trading on insider information related to block trades under any circumstance until after a public report of a relevant transaction.

  • Bank Settles With SEC for Alleged Overstatements of Assets Under Management to Attract New Business: Credit Suisse AG agreed to settle charges brought by the Securities and Exchange Commission that, from at least October 2011 through December 2012, it inflated its reporting of new assets under management by the wealth management business within its private bank division utilizing a methodology that was contrary to its public disclosures. According to the SEC, Credit Suisse used a subjective methodology to inflate AUM while its public filings suggested it would use a methodology based on an assessment of “each client’s intentions and objectives and the banking services provided to the client.” The SEC said that disclosure of new assets under management was an “important disclosure for investors in financial institutions like Credit Suisse.” To resolve this matter Credit Suisse admitted the adverse facts cited by the SEC in its Order instituting its enforcement action, acknowledged its violations of certain enumerated securities laws, and agreed to pay a fine of US $90 million. In accepting its offer of settlement, the SEC acknowledged Credit Suisse’s cooperation and corrective measures. Separately, Rolf Bogli, chief operating officer of Credit Suisse’s private banking division at all relevant times to the SEC’s enforcement action, was charged with pressuring other bank employees to classify certain client assets in a way to inflate its AUM “despite concerns raised by others.” Mr. Bogli agreed to pay a fine of US $80,000 to resolve the SEC’s charges.

And more briefly:

  • FCA and CFTC Agree to New MOU to Enhance Cross-Border Cooperation: The Commodity Futures Trading Commission and the UK Financial Conduct Authority entered into a memorandum of understanding to share certain information related to entities that have applied to be or are duly licensed to act as swap dealers or major swap participants under US law and have also applied to be or are similarly authorized by the FCA. The MOU is in addition to other MOUs entered into between the CFTC and the FCA and its predecessors for other purposes.

  • Disruptive Trading Prohibition Proposed by CME Group SEF: The Swap Execution Facility Division of the Chicago Mercantile Exchange proposed a new disruptive trading practices rule identical to the current CME Group rule prohibiting such practices on its designated contract market facility (click here to access CME Group Rule 575). The new rule will be effective October 24 absent CFTC objection.

  • ESMA Consults on Governance for Trading Venues: The European Securities and Markets Authority sought comment of proposed guidelines related to a requirement under the Markets in Financial Instruments Directive II that members of the management body of a market operator be competent to serve in such capacity. Among other things, MiFID II requires such persons to “commit adequate time to perform their functions” and have adequate knowledge and experience to perform their duties. ESMA will consider all comments submitted by January 5, 2017.

  • CFTC Staff Extends SEF Block Trade Relief: The Division of Market Oversight of the Commodity Futures Trading Commission extended the expiration date of previously granted no-action relief that permits a swap execution facility to provide use of its trading system or platform to facilitate the execution of block trades that are intended to be cleared. Under applicable rules, block trades must occur “away from” a SEF’s or designated contract market’s trading system or platform. The relief allows SEFs to help futures commission merchants meet their obligation to pre-screen certain swaps orders to ensure their compliance with risk-based limits. DMO’s no-action relief expires on November 15, 2017.

©2021 Katten Muchin Rosenman LLPNational Law Review, Volume VI, Number 284



About this Author

Gary DeWaal, Securities Attorney, Katten Law Firm, New York
Special Counsel

Gary DeWaal focuses his practice on financial services regulatory matters. He counsels clients on the application of evolving regulatory requirements to existing businesses and structuring more effective compliance programs, as well as assists in defending and resolving regulatory disciplinary actions and enforcement matters. Gary also advises buy-side and sell-side clients, as well as trading facilities and clearing houses, on the developing laws and regulations related to cryptocurrencies and digital tokens.

Previously, Gary was a senior...