There were two disciplinary notices issued in the last two days by CME that help point out the issue. The first is a position limits violation, the notice is here. The violations occurred on May 26 and 27, 2020. This type of exceedance of the position limit would have been evident in exchange surveillance scans before the open of business the next day. That means that the initial activity of the exchange oversight group would have occurred before the end of May, 2020. This means that the time from the beginning of the inquiry to resolution was eight months. Let's be conservative and say that real activity to defend this activity (meaning in house general counsel was now engaged, as well as head of desk, in determining what would happen) didn't start until the end of June. Outside counsel was likely to be brought in by the end of July, if not earlier.
This means that senior executives have been burdened with this issue for over half a year. Outside counsel was likely to be engaged for the same time. If this didn't run over a million dollars in hard and soft costs I would be surprised (and I expect that number to be way too low as it is). Add into that the reduced efficiency caused on the trading desk and the firm for that time and the cost escalates further.
yes, the fine was only $25,000 with a $72,318 disgorgement but look at the overall cost. Keeping these things from happening or being able to self-report and shortcut this proceeding would have saved an order of magnitude reduction in costs.
The second case is here. This is another case where desk staff used a fake EFRP to move positions between two accounts rather than using a back office transfer at the exchange (which does the same thing and is legal). The trade in question was executed on March 6, 2020 and the fine was $25,000. The same analysis can be looked at as above - this case took an additional two months more. This would just increase the costs.
The real analysis for the value of compliance programs and systems that work is that hidden cost of the internal and external effort to analyse and defend the disciplinary action. The exchanges expect a significant effort to address the activity and root causes for a violation or they can become more assertive in their disciplinary action - up to an including significant suspension from access to their market.
You should examine your activity on exchange markets in the US and think about how quickly and completely you could identify an issue such as these and rectify them. If you couldn't, you should consider enhancing your program to avoid the hidden costs of an exchange disciplinary action.
DCM provides compliance program reviews and controls testing for the commodity markets. Please drop us a note if you would like to have a chat.