CFTC, not an exchange, fines Tyson Foods $1.5 million for position limit violations and false Form 204 filings - updated
In one of the larger position limits violation fines in recent history, the CFTC fined Tyson Foods for repeated violations of the CFTC position limits in soybean oil as well as for filing false Form 204 reports (which state the underlying cash positions that support a futures position for hedging.
The CFTC press release is here and it lays out a pattern of both position limit violations and false reporting to protect those positions.
The press release states that Tyson Foods violated the CFTC position limits under the Commodity Exchange Act for 590 days between January 2016 and January 2021 - which, assuming roughly 1,250 trading days in that period, is almost 50% of all trading days in the period. In addition, the CFTC states that for every month but 2 in that period Tyson Foods filed an incorrect Form 204.
The CFTC cites Tyson Foods cooperation with the investigation - including self-reporting violations that occurred after the state of the investigation - as the reason for " a reduced civil monetary penalty."
This should be noted by energy and metals trading firms as the new CFTC position limit rules will include certain energy and metals contracts under the direct CFTC position limits as of January 1, 2022.
Updated - the full CFTC order is now available here. The order clarifies several things:
First, Tyson filed the settlement offer and it was accepted - the $1.5 million was Tyson's proposal.
Second, in case it wasn't clear, the Form 204 filings are the representation by a company of its hedgeable position. In other words, filing an improper hedge exemption is akin to filing a false Form 204 - an incorrect hedge exemption request is not a false filing under Dodd Frank but energy and metals firms should be aware that under the new position limit rules effective January 1, 2022 the hedge exemption request to an exchange is also a bona fide exemption filing under the new CFTC position limits. You might check with counsel as to whether an incorrect hedge exemption request to an exchange might also be a violation of CFTC rules after that date.
Third, the CFTC specifically cited that for some months the filed amount of cash positions in the Form 204 exceeded the actual cash positions held by Tyson. DCM has advised multiple clients that, just as the CFTC cited regarding the Form 204, exchange hedge exemption filings are a maximum authorized hedge exemption. The hedge exemption is actually only valid to the amount of bona fide hedges held by a company at any given time. In other words, if you have a hedge exemption for 2.500 lots based on a physical or other offsetting position you did hold it does not mean that hedge exemption is perpetual. Your current hedge exemption is actually based on your current bona fide hedge positions - if they have decreased from the time the hedge exemption was filed, then the hedge exemption has likewise declined. Your firm should be tracking your bona fide hedge positions versus your hedge exemption quantity.
Fourth, the order indicates that Tyson, when reviewing its calculations for the Form 204, found it was using incorrect conversion factors, mitting certain transactions from the calculations, and, in some cases, just taking its open futures positions, converting them to bushels equivalent, and reporting the futures overage as its cash positions. All of these factors contributed to filing inaccurate position reports to the CFTC - and all violations of CFTC rules.
Fifth, the CFTC has, in this case, generalized what Tyson did in a manner that will potentially be more broadly applicable. The order cites:
"it (is) unlawful for any person to make any contract for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market in excess of position limits established by the Commission, “unless such person files or causes to be filed with the properly designated officer of the Commission such reports regarding any transactions or positions [in excess of position limits] as the Commission may by rule or regulation require.”
Note this indicates any filing that is required - the hedge exemption filings to exchanges under the new position limit rules is a report required to be filed under CFTC rules. This would imply that the reasoning in this order could apply to any hedge exemption for the new CFTC position limits managed by the exchanges.
Sixth, the CFTC states that:
" it unlawful for any person to make any contract for the purchase or sale of any commodity for future delivery on or subject to the rules of any contract market in excess of position limits established by the Commission, unless, “in accordance with rules and regulations of the Commission, such person shall keep books and records of all such transactions and positions and transactions and positions in any such commodity traded on or subject to the rules of any other board of trade or electronic trading facility, and of cash or spot transactions in, and inventories and purchase and sale commitments of such commodity.” Section 4i specifies that “[s]uch books and records shall show complete details concerning all such transactions, positions, inventories, and commitments, including the names and addresses of all persons having any interest therein ….” Regulation 1.31(b)(3), 17 C.F.R. § 1.31(b)(3) (2020), specifies that such records shall be maintained for a period of five years.7 Regulation 1.31(c), 17 C.F.R. § 1.31(c) (2020), specifies that such records shall be created and retained in a form and manner that ensures the authenticity and reliability of such records. There is no scienter requirement for recordkeeping violations. "
This means that the is a recordkeeping requirement for all bona fide hedge transaction to support exceedance of a CFTC position limit that runs for five years after the date of the exceedance. DCM would not be surprised if a significant number of energy, agricultural, and metals trading firms do not have a specific process and procedure to cover this requirement.
This case turns out to be a very good refresher on the intricacies of CFTC position limits. It would be appropriate for many firms to review their existing process from identification of bona fide hedges, through filing of hedge exemptions, to recordkeeping for underlying physical positions. DCM is happy to help advise or even perform procedure reviews and controls test for interested parties.