Block Trades and Audit Trails - CME issues a lot of fines today

Busy day on the CME disciplinary front - six different disciplinary notices today. The majority were regarding block trade timing misreporting and bad broker electronic audit trails.

There were two outliers - both dealing with automatic trade systems that were badly programmed and caused aberrant orders to be entered. In both cases, it appears that the issue was identified and improperly solved and redeployed. Finally, in both instances, the problem was fixed. The fines were $25K and $35K and in one case there was a 30 day suspension form ytrading for the trader who made the mistake.

The block trade notices fell in two categories - a broker reporting block trades with inaccurate times and not within the required time period or a trader failing to report within the required time period, reporting inaccurate trade details and pre-hedging in violation of exchange rules. In one case, the reporting party was a principal to the trades and was pre-trading in its own account prior to execution at a price that was to its benefit. In this case, the fine was $150K plus a $74K+ disgorgement. 

The exchange has issued very specific rules as to what activity can be performed in anticipation of a block trade execution. Failure to follow these rules - which basically ban arbing the client order against the market prior to executing the block trade. The exchange has issued several disciplinary notices in this area in 2019. The amount of notices in this area would indicate that block trade execution and reporting have been undergoing increased scrutiny since 2018 - companies should reexamine their training and guidance on block trades - both reporting and trading in relation to any bilateral block trade communications.

One of the broker block trade actions also covered disclosure of counterparty information regarding the trade. Exchange rules allow for disclosure of specific trade information only when authorized by the parties to the trade.  The exchange noted the failure to properly supervise and train staff in this instance as well. The broker fines were $60 and $70K.

The final notice was a very large fine - $650K - to ADM Investor Services. In this instance, a client of ADMIS was using an improper method of offsetting omnibus account positions using FIFO accounting. It should be noted that this discplinary notice does not cover the underlying entity's activities. However, notice should be taken that there are very specific allocation rules that must be followed in managing omnibus accounts. The CME noted - "As a result, inaccurate open interest data was published to the market". This, obviously, is "not a good thing".

Compounding the issue, ADMIS used customer provided information to report to the CME during the investigation - which information the CME ascertained to be incorrect. The CME cited the initial failure to keep accurate audit trails, the use of inaccurate client audit information, and the lack of supervision and training as actionable items. As noted, the fine was $650K.