Bridging the Week by Gary DeWaal: October 3 to 7 and October 10, 2016 (Strict Liability; EFRPs; Block Trades; Inflated AUM)

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Published Date: October 09, 2016

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:

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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.


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. (Click here for details regarding CME Group’s immediately offsetting FX EFRP requirements in the article, “CME Group Overhauls EFRP Rule and Guidance; Clarifies Roles of Executing and Clearing Firms and Provides New Relief” in the September 25, 2016 edition of Bridging the Week and here for a discussion of the relevant IFUS requirements in “ICE Futures U.S. Issues Amendments to Rule and New Frequently Asked Questions Related to EFRPs” in the August 17, 2014 edition of Bridging the Week.) 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. (Click here, e.g., for background in the article, "Lord Voldemort Hovers Over the Futures Industry: CME Prohibits All Transitory Exchange of Futures for Related Position Positions by Name" in the April 14, 2014 edition of Between Bridges.) 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.

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.

And more briefly:

For more information, see:

Bank Settles With SEC for Alleged Overstatements of Assets Under Management to Attract New Business:

CFTC Staff Extends SEF Block Trade Relief:

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

Aspire Commodities:
Geneva Trading:
Goldman Sachs Asset Management:
Manoj Jindal:
Robert Kimmons:
Larry Johnson:
Krysztof Marzec:

Disruptive Trading Prohibition Proposed by CME Group SEF:

ESMA Consults on Governance for Trading Venues:

FCA and CFTC Agree to New MOU to Enhance Cross-Border Cooperation:

ICE Futures U.S. Proposes to Authorize Settlement of Certain Forward Contracts and Swaps Through EFRPs:

Pre-Hedging of Block Traders Permitted by Principals to Block Trades Prior to Trade Finalization Under Ice Futures U.S. Proposed Guidance Clarification:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of October 8, 2016. 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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