Today - Employees fined for acting for Employer, employers fined for employee actions and the fines are LARGE
The CBOT issued a pair of fines that follow from the July 12, 2018 fine to Lansing Trade Group ($3.5MM fine in CBOT 15-0160-BC-1). These fines were for two individuals that were involved in entering the orders on the CBOT for Lansing. Both employees were cited for entering the orders to effectuate the Lansing plan and then also cancelling load out of physical delivery. In addition, both employees were cited for notifying multiple market participants of the intent to cancel the physical deliveries. The exchange fined one employee for $125K and the other for $250K. Both employees were also barred from the market for four years. This fine is significantly less than the $3.5 million Lansing paid but the employees have significant personal and professional losses. The notice on the larger fine is here - https://www.cmegroup.com/notices/disciplinary/2018/09/cbot-15-0160-bc-3-peter-grady.html#pageNumber=1
The second set of fines were for two individuals and the firm bearing their names in ag futures trading. This fine has a number of components - first, the firm had a broker that had over-traded client accounts when the broker held trading discretion, in some cases in excess risk tolerance and, in some cases,of the credit capacity of the client account; second, the broker caused over $11 MM in losses in the client accounts; and third, the broker appears to have lied to the CME when asked if they knew about whether the broker had traded without or in excess of authorization. The findings also included a failure to supervise as there were customer complaints and account margin calls that should have alerted the individuals as to the broker's actions. The impact was significant: $8.7MM in restitution under a CFTC order, $1.25MM in fines to be paid jointly and severally by the the two individuals and the firm, a 15 month suspension from trading on any CME market and, finally, a permanent bar for the two individuals from handling any customer orders as a broker on any CME exchange. The firms disciplinary notice is here - https://www.cmegroup.com/notices/disciplinary/2018/09/cme-14-9938-bc-3-kooima---kaemingk-commodities--inc-.html#pageNumber=1
The CME in the past has fined one actor in a spoofing case. Today it issued four notices - all with the same main notice # - 16-0455 - from both CME and CBOT for both Geneva Trading USA and a specific trader for "disruptive trading" - specifically entering orders without intent to execute. What they did here was to issue two disciplinary notices against the company requiring disgorgement of profits (one for the CME disgorgement and one for the CBOT disgorgement and another pair for the trader who was acting as agent for the company. The trader/agent was fined $75K and suspended from all CME markets for six weeks.
This does indicate that if the person acting as agent enters into disruptive activity the company may not be held directly accountable - presumably because there was no evidence showing the company directed its agent to violate exchange rules.
This does mean that you cannot keep profits that an agent obtained for you against exchange rules even if you didn't know they were violating rules to get the profits for you. Interesting point to keep in mind - as DCM advises clients, compliance and risk need to focus on how you make money, not just that you make it. One of the disciplinary orders for the agent is here - https://www.cmegroup.com/notices/disciplinary/2018/09/cbot-16-0455-bc-1-garrett-connery.html#pageNumber=1; the correspnding notice for the company is here - https://www.cmegroup.com/notices/disciplinary/2018/09/cbot-16-0455-bc-2-geneva-trading-usa-llc.html#pageNumber=1
I had the opportunity to speak at a Risk.Net training for energy firm surveillance last week. As an aside, Sean Collins from FERC Analytics and Surveillance was the initial speaker and the attendees appreciated his information on the FERC program. I would recommend anyone in the US natural gas or power trading space take any opportunity to hear him speak.
One of the points attendees always react to is the exchange's practice of assessing fines for failure to supervise. A company is responsible for their staff being adequately trained and motivated to follow exchange market compliance rules. These are not always the more prominent "spoofing" or manipulation cases - these are often reporting or business process rules.
In last week's notice, the fine came from failure to train and oversee the staff. The violation arises under the "General Offenses" Rule for the CME - Rule 432, specifically:
"W. for any party to fail to diligently supervise its employees and agents in the conduct of their business relating to the Exchange."
This was a case of failing to properly onboard clients and, in noted cases, allowing brokers to tell traders to backdate onboarding papers to be able to trade before the papers had cleared.
The firm was fined $75K - split between two CME exchanges. The notice is at https://www.cmegroup.com/notices/disciplinary/2018/09/COMEX-16-0486-BC-2-ZERICH-SECURITIES-LIMITED.html#pageNumber=1
Training and oversight are not just a check the box - they are important controls.
Enterprise Products just got fined $100K for having multiple wash trades over a 10 month in 2016. The trades were in multiple energy contracts and they were trades between accounts with the same beneficial owner (looks like trades in the exchange across books but not the same account - which would have been a cross trade.). The notice also cited lack of training of staff that contributed to the occurrences.
We like to think of market regulation fines as "parking tickets" - something of a nuisance. The problem is, if left unaddressed, they can turn into speeding tickets. Surveillance of manipulation isn't the only thing compliance needs to cover - compliance with basic market regulations is important too. The notice is here - https://www.cmegroup.com/notices/disciplinary/2018/09/NYMEX-17-0641-BC-1-ENTERPRISE-PRODUCTS-PARTNERS-LP.html#pageNumber=1
DCM LLC can help with compliance training and surveillance needs. We would be happy to speak with you.
))One of the more contentious ares during the development of regulations under the Dodd Frank Act was the coordination of the developing global regulatory environments. There was a protracted discussion concerning the margin to be charged by clearinghouses between US and European regulators.
Chairman Giancarlo spoke yesterday at the Milkin Institute and discussed revision of the cross border regulations adopted by the US. He indicated in interest in altering the rules concerning non-US firms that provide services to US clients. Having been involved with discussions with firms that were looking at extending retail foreign exchange brokerage to the US, I can agree that the burden of complying with the Foreign Retail Foreign Exchange brokerage rules was a major consideration regarding the decision to invest in US expansion or to expand elsewhere. These changes would have impact. This approach is seen as being more deferential to local regulatory authorities.
On the other hand, the EU's rules under MIFID II and other regulations have taken the opposite approach. One area of contention is the proposed rules by the EU that would apply EU regulations to clearinghouses servicing customers and products based in the EU.
The CFTC Commissioners have disagreed with this proposal. Commissioner Quitenz spoke in June saying:
A troubling argument that I have heard recently attacking such a deference-based approach focuses on “regulatory arbitrage,” and postulates that market participants move to the jurisdictions with the least onerous regulation, thereby incentivizing jurisdictions to participate in a regulatory “race to the bottom” to win market share for their countries and economies. Let me be clear – I completely reject this disingenuous claim.
Market participants seek neither the least nor the most regulated marketplaces, but rather marketplaces that have the best balance of sensible, objective, and reliable regulation." (From speech released by the CFTC here )
This divergence between the US and EU has the potential to escalate into a regulatory battle. With the emergence of new markets in the APAC region and others, this could be a significant factor in future expansion decisions and trading firm locations. This is a development worth keeping an eye on.
Block trade reporting is a simple exchange rule requirement. The technical aspects vary slightly between exchanges but there are three basic things you need your staff to now:
1. Are you doing a bilateral trade that needs to be reported or is there a broker responsible?
2. If you are reporting, do you know the reporting path and the time period in which you need to report?
3. Do you know what data has to be reported and is there a party in your firm responsible for the report?
The CME just fined ICAP $1k for failing to report three trades on time. The notice is here - https://www.cmegroup.com/notices/disciplinary/2018/08/cme-rsrh-18-5143-icap-corporates-llc.html#pageNumber=1. The fact that the violations were only 4 months ago lets you know how closely they follow this.
The fine is only something like a corporate speeding ticket but it also serves as an indicator to an exchange that your staff may not be properly trained and compliance may not be rigorously supervising activities. It is better to make sure that you have training and operational materials covered.
DCM provides training and guidance materials for interested clients - just ask us.