Once again a trader has figured out that the cross block functionality can be used to cancel orders used in spoofing. A trader was just fined $90K, forced to disgorge just less than $12K, and was suspended from trading on an CME platform for 30 days. The system used was simple:
1. Enter trades above the offer or below the bid; and
2. Wait for others to join; and
3. Hit the bid (or left the offer) - knowing that the crossblock functionality would prevent him (in this case) from executing and would cancel the resting order.
This is the second time in my memory that someone has been disciplined for exactly the same system of activity. As I like to tell my clients, having this happen as a rare occurrence may not trigger alarms. The disciplinary notice talks about activity between February to March in a single year across multiple contracts. This stops being an accident and starts looking like a pattern.
Do you look at things like this? The notice is here - https://www.cmegroup.com/notices/disciplinary/2017/11/cbot-16-0489-bc-timothy-roach.html#pageNumber=1
Can we agree that wash trades are not allowed, please? Once again a group did them.. and got caught.
After crawling out of a long turkey induced stupor and realizing I hadn't been looking at my reading material, I came across the latest group think on wash trades. There were three separate issued disciplinary notices in COMEX-16-569-BC, all relating to wash trades that were pre-arranged but not performed properly on the exchange.
You are allowed to pre-arrange a trade IF you post the first side and then wait 5 seconds before posting the other side. The CME even lays out the citation (Rule 539.C) and cites how you do this.
But the parties in these cases did not follow the rules and, to make matters worse, one person also violated the rule I frequently talk about, Rule 576 regarding use of the Tag 50 IDs but individuals other than the person it was issued to.
So, they were prearranging the trades and one of the parties was using another person's Tag 50 to execute (in some cases).
The two individuals who executed wash trades but did not violate the Tag 50 ID rule were given minor fines ($5K and a six month suspension from trading in one case and $35K and a one month suspension in the other case). The third person with the Tag 50 issues was fined $45K and permanently barred from all CME exchanges. That notice COMEX_16-0569-BC-2 is here - https://www.cmegroup.com/notices/disciplinary/2018/11/COMEX-16-0569-BC-2-THOMAS-POULOSE.html#pageNumber=1
It is not worth trying to do this - the exchange will find the pattern of executions and the result won't be pleasant.
On November 15, the FERC issued its annual enforcement overview - the entire document can be found here. The document is 68 pages and covers a variety of issues, including recaps of all civil court cases and settlement. Several items DCM found of interest were:
1.) There is an 8 page discussion - with graphs - of the self report in the prior year. There were 137 self report (over the average of just about 100 per year for the prior five year period). The FERC has put an emphasis on encouraging self-reporting with a stress on the mitigating effect of self-reporting. The majority of items were OATT and Tariff issues from the ISO/RTOs. The staff closed 122 of the 137 self-reports within the year. The discussion in the section includes items such as 10 generator self-reports of bids in excess of cost based bidding. Staff indicated the reporters included descriptions of actions to avoid recurrences of the issue and all self-reports were closed without further action. There was also a self-report by a utility for disclosure of material no-public information by its transmission staff to its marketing staff. The self report discussion indicated similar corrective measures to avoid recurrence and the report was closed without further action. Other no action discussion covered Form 552 filing errors, Solar QF sales violations, Shipper Must Hold Title violations, and Price Bid Curve violations - all settled without further action.
2.) In a number of cases, the self report discussion indicated that the reporting company promptly hired a third party to review the activity and recommend corrective actions - which were adopted. The staff appears to consider the use of a third party as an indication of intent to fully examine the issue and take corrective action. This might be a consideration in determining whether to perform an entirely internal assessment or to reach out to a third party.
3.) Pages 62 to 64 contains a review of the market surveillance activities of the FERC including representative examples of flagged activity and the FERC resolution of the flagged activity with the market participant (they describe the type of firm being contacted). These cover power and gas - there were "approximately" 7,719 alerts for natural gas and FERC ran 84 monthly, hourly, and intra-hourly screening models. Only 18 of the 7,719 natural gas alerts required opening an inquiry and only 1 was referred for an investigation. On the power side, there were 376,588 items of which 37 items were referred for inquiry with 25 closed with no further action and 4 referred for investigation ( 3 remain open for further work without referral or closure). DCM recognizes these individual dispositions on power are not complete for all 37 and we will attempt to understand the discrepancy.
In general, the report does give a good overview of what the FERC is looking at and what they are finding. DCM is happy to have a conversation on this or other commodity topics.
Risk and compliance - they are intertwined. Look at the CME emergency action on trading limits yesterday
Yesterday, the NYMEX nat gas contract had a limit move. This is a compliance rule that can have a direct impact on a company's risk analysis. Late yesterday, the CME declared an "Emergency Action" to increase the limits for trade moves intraday from $0.30 to $0.50 for the NG contract and seven other related products (last day futures and others all directly related to NG) effective this morning. This has just changed the risk profile of a front month move without a limit break. The CME notice is here - https://go.cmegroup.com/webmail/502091/218011477/1ffb0325164e907555ccefdb1d9132bac8271174a0ef19b44f91233a740e6a73. So - is this something your risk manager, general counsel or your compliance officer tracks in your company? That is why process for allocation of responsibility is so critical in this space.
The CME issued a notice on the position limit, position limit aggregation, and large trader reporting rules for two new half month Platts based contracts on Japan/Korea LNG. There are couple points in the order that provide the opportunity to refresh position limit rules on the CME.
First, the large trader reporting limit (the level at which your positions will be reported by name to the CFTC) is only 25 contracts. It is likely anyone trading this contract will be subject to the broker reporting rules.
Second, these two contracts aggregate for position limit purposes up into the the full month JKM contract. Therefore, JKM (full month), JKF (front half month), and JKB (back half month) will all aggregate up into a single position for spot and all month accountability position limits.
It is important to remember that the aggregation rules for position limits as well as declining balance contract analysis are important component of your position limit analysis.
We would like this to be helpful to both US and non-US based firms trading in this and other CME products.
The CME published an Market Regulation Advisory Notice today regarding summary fines for reporting infractions (what I like to call exchange traffic tickets). These are the fines for EFRP or Block or Large Trader reporting issues. There is a list of items - many of which are more applicable to broker/dealers than traders or firms hedging through the exchange. However, the CME points out that though the CME can - at its discretion - issue a warning notice, CFTC regulations allow them no more than 1 warning notice per 12 month period for a type of violation. After that, the CME is required to impose a fine. The fine is no less than $1K and no more than $5K for an individual or $10K for a firm per offense.
These are areas that the CFTC has repeatedly raised in its rules review with the exchanges noting that the CFTC feels too many reporting errors have been noted but not subject to a fine.
This type of summary market advisory notice is intended to direct companies to pay more attention since the CME feels it has to be stricter regarding the issuance of fines. It is the right time to review, and possibly test, your reporting controls to make sure you don't end up with a bunch of traffic tickets. Feel free to reach out to us if you have questions.
The full notice is here - https://www.cmegroup.com/content/dam/cmegroup/notices/ser/2018/11/RA-1812-5.pdf