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CME Implements Significant Penalty Increases for Futures and Swaps Trading Violations

Effective December 14, 2016, and subject to CFTC regulatory review periods, the Chicago Mercantile Exchange Inc., The Board of Trade of the City of Chicago, Inc., New York Mercantile Exchange, Inc., Commodity Exchange, Inc. and the Swap Execution Facility Division of Chicago Mercantile Exchange Inc. have adopted amendments to the rulebooks of their respective platforms. The amendments relate primarily to rule enforcement and impose significant penalties on individuals subject to disciplinary proceedings. These rule changes are in response to the “increasing complexity of disciplinary matters,” such as recent and very public cases involving spoofing of derivatives markets through the use of automated trading programs, and are intended to ensure greater deterrence from any rule violations. In some ways, these amendments are, more onerous than the penalties the CFTC is able to impose. Market participants should review these rules carefully to be certain they understand the impact of them and ensure their trading policies and procedures are in line with industry best practices.

Of particular note are the following:

Rule 402 (“Business Conduct Committee”): The rule amendments have enhanced Business Conduct Committee Panels’ (“BCC Panel”) sanctions ability. The amendments have increased the BCC Panel’s monetary sanctioning authority from $1 million to $5 million for each offense. Note that the CFTC can only impose a civil monetary penalty of $1 million in matters involving market manipulation. In addition, the BCC Panel may order a party to disgorge any monetary benefit from exchange rule violations (whether by such party or another party). A BCC Panel now may also require a party to pay out-of-pocket expenses incurred by the relevant exchange or facility arising from “vexatious, frivolous or bad faith conduct” of such party during the course of an investigation or enforcement proceeding.

Rule 407 (“Investigation, Charging Memorandum and Notice of Charges”): The rule amendments allow a BCC Panel to prohibit a person from testifying in a subsequent hearing on a matter, if such person failed to appear at a scheduled interview or to answer all of the questions posed during that interview.

In addition, the amendments provide additional flexibility to the Market Regulation Department (“Market Regulation”). Market Regulation may investigate an activity underlying the charges (or investigating other potential violations) even after charges have been issued. Moreover, Market Regulation may decline to prosecute any of the charges previously issued by a Probable Cause Panel (“PCC”).

Rule 435 (“Effect of Suspension or Expulsion”): The amendments also have clarified that suspension or expulsion of a member includes the loss of such member’s right to directly (or indirectly) access to the Globex platform or other exchange or facility owned or controlled by the CME Group.

© 2020 Covington & Burling LLPNational Law Review, Volume VI, Number 356
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About this Author

Anne M. Termine, Covington, securities litigation attorney
Of Counsel

Anne Termine is a member of the firm’s Global Futures and Derivatives Practice and leads the Derivatives Enforcement Team. She is also a member of the white collar defense and investigations practice. Ms. Termine advises clients in handling internal investigations and regulatory enforcement inquiries related to the derivatives markets and the cryptocurrency markets.

Prior to joining Covington, Ms. Termine was a Chief Trial Attorney in the U.S. Commodity Futures Trading Commission's (CFTC) Division of Enforcement, where she was responsible for investigating and...

202-662-5827
Stephen Humenik, regulatory and public policy lawyer, Covington
Of Counsel

Stephen M. Humenik leads the firm’s futures and derivatives practice. He has extensive experience on cross-border regulatory, compliance and enforcement matters involving the U.S. Commodity Futures Trading Commission (CFTC) and markets for derivatives and physical and financial commodities. Mr. Humenik applies his business, operational, and government experience to the implementation of CFTC regulations, including the registration, trading, clearing and other compliance obligations of the Dodd-Frank Act and other global regulatory reforms.

202-662-5803
James Kwok, Covington Burling, Corporate Lawyer, Investment Banking
Associate

James Kwok provides advice to financial institutions, asset managers and commercial entities with respect to derivatives. He also regularly represents clients on a wide range of regulatory and policy matters, including with respect to federal securities law, the Investment Advisers Act, and the Commodity Exchange Act.

Mr. Kwok also has passed all three levels of the Chartered Financial Analyst exams.

212 841 1033
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