Money Pass, Wash Trade - name may change but the CME still is looking for it. Updated with ICE notice
Back on October 1, this blog looked at a CME disciplinary notice on "money pass" - pre-arranged trades between two account to move equity from one account to another. In the last two weeks (sorry, I was out at COP26 and wasn't keeping up on the blog), there have been two more similar disciplinary actions.
The first, issued on November 5 (notice here) was for an individual who "prearranged the execution of round-turn transactions in various options on Silver futures between (his) personal account and his employer’s account for the purpose of transferring equity to his personal account." Once again, the person did not respond to the CME inquiry and was fined $60K and suspended from CME markets for three years.
The second, issued as two notices on November 19, was a case where two individuals -prearranged trades to move money between their accounts. The interesting aspect in this set of cases is that one individual, notice here, was charged under Rule 432.G - general offense to pre-arrange trades to transfer equity - and Rule 576 - Tag50 violation - while the other individual was charged under Rule 534 - Wash Trades - for the opposite sides of the activity. Both were fined $40k and suspended for 20 days from the CME markets.
It should be noted that the later set of violations had a significantly lower fine and suspension period. There was no indication that the individuals in the latter case did not fail to respond to the CME inquiry. This responsiveness would be indicated from the note that the latter two individuals were fined in accordance with "an offer of settlement".
Two things to think of here:
First, there are multiple avenues for the CME to pursue activities that are undertaken to transfer equity - whether knowingly by both parties or only by one side of the activity - under the exchange rules. But all of them can be summarized by "no trades intended to transfer money between two accounts by individuals intending to use the exchange as the mechanism for transfer are legal". This is an activity that has been the focus of exchange trade surveillance models for years and they are still very effective in finding this activity and disciplining it.
Second, deciding to go silent and refuse to participate in an exchange inquiry is just going to make matters worse. Thinking you can force the exchange to drop an inquiry because you don't participate isn't going to work. They have all the trade and order level data - they don't need to prove intent. This is not a court action where there are rules of procedure and discovery. If they call you, get legal representation to help you but don't refuse to participate. It won't end well.