Bridging the Week by Gary DeWaal: January 19 to 23 and 26, 2015 (Swiss Francs; Block Trades; Disruptive Practices; Corporate Culture; Position Limits; Privacy)

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Published Date: January 25, 2015


The fallout from the January 15 decoupling of the Swiss franc from the euro by the Swiss National Bank continued to have regulatory and legal reverberations last week. In addition, Chicago Mercantile Exchange Group exchanges resolved a cornucopia of disciplinary actions touching upon rules related to block trades, automated trading systems, disruptive trades and wash sales. As a result, the following matters are covered in this week’s Bridging the Week:

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Swiss Franc-Euro Decoupling Spurs Worldwide Legal and Regulatory Fallout

Following the unexpected decoupling by the Swiss National Bank (SNB) of the Swiss franc-Euro exchange rate on January 15; the subsequent meteroic rise of the Swiss franc against the euro and, to a lesser extent, the US dollar; and the financial difficulty experienced by at least two international retail foreign exchange dealers, several exchanges and at least one regulator instituted a number of interim measures and promised more.

Among measures taken by exchanges and one regulator:

Because of the SNB’s decoupling, at least two firms maintaining substantial retail clientele trading foreign exchange experienced significant losses and capital issues as a result of their clients’ trading losses. This prompted one of the firms (based in the United Kingdom)—Alpari (UK) Limited—to initiate an insolvency proceeding last week. The other firm, Forex Capital Markets LLC—commonly known as FXCM—a CFTC-registered retail forex exchange dealer, futures commission merchant and provisionally registered swap dealer—received a US $300 million infusion from Leucadia National Corporation “to meet its regulatory-capital requirements and continue normal operations” after losing US $225 million.

In response, Commissioner Sharon Bowen of the Commodity Futures Trading Commission suggested that the CFTC should look into greater regulation of retail foreign exchange dealers:

As I have said before, we have an obligation to prevent the establishment of “gaps” in our regulations. If we find that a part of the swaps or futures industry is so lightly regulated that investors, markets, and the public are being placed in undue risk, we have an obligation to fill that gap and establish a more efficient and effective regulatory regime…. Specifically, I believe we should consider establishing regulations on the retail foreign exchange industry that are at least as strong as the regulations on the rest of the derivatives industry.

Futures Traders Sanctioned by CME Group Exchanges for Problematic Block Trades, ATS Breakdown, Disruptive Trading, Wash Sales and Other Violations

Exchanges of the Chicago Mercantile Exchange Group imposed numerous sanctions against members and nonmembers related to violations of a cornucopia of rules that address wash sales, block trades and conduct of the nature of spoofing, among other prohibited conduct. One firm was also fined in connection with its automated trading system breakdown.

Block Trades

According to the relevant CME Group business conduct committee (BCC) panels, at various times from March 2010 to May 2013 on the Chicago Mercantile Exchange, and from April 2010 to September 2013 on the Chicago Board of Trade, JP Morgan Securities LLC (1) failed to report accurate execution times for certain block trades; (2) failed to report certain block trades within required time deadlines; (3) did not keep order tickets or other acceptable records of executed block trades; (4) in one instance, reported an inter-commodity spread trade as a block trade when the transaction did not meet the minimum quantity threshold for inter-commodity spread block trades; and (5) reported two block-eligible spread trades in foreign exchange futures with individual legs that were not executed at a single price. In aggregate, JP Morgan agreed to pay US $115,000 to settle these alleged offenses.

Open Position Reporting

JP Morgan also agreed to pay US $95,000 in aggregate to resolve separate charges related to its alleged failure to correctly report open interest during a number of spot-month expiration periods for different futures contracts traded on the CBOT and CME. The relevant BCCs claimed the violations occurred because of operational errors, including, in one instance, “an internal account assignment error that placed futures position resulting from [one] options expiation and subsequent assignments into the wrong subaccount.”

ATS Breakdown

Credit Suisse Securities (USA) LLC agreed to payment of a fine of US$ 175,000 related to an alleged breakdown of an automated trading system that caused an “excessive” number of order and cancel messages on December 14, 2012, involving the March 2013 Two-Year futures contract traded on the CBOT. According to the relevant BCC, although Credit Suisse learned of its malfunction immediately, it permitted its ATS to continue operating for 90 minutes while it endeavored to correct the error. During this time, claimed the BCC, the ATS was responsible for 88% of the messaging volume in the relevant futures contract.

Credit Suisse was previously fined US $150,000 by CME and US $25,000 by ICE Futures U.S. for other ATS breakdowns. (Click here for details in the article, “CME Group Sanctions Member for Not Having Adequate Controls to Prevent Automated Trading System Erroneous Response to Bad Data” in the November 17 to 21 and 24, 2014 edition of Bridging the Week.)

Disruptive Trading

A number of traders settled actions related to disruptive trading practices.

In one action before a New York Mercantile Exchange BCC, Robert Leeds was charged with engaging in acts “inconsistent with just and equitable principles of trade” for problematic conduct on “one or more” occasions between February and June 2012. According to the BCC, during these times, with a resting order on one side of the market involving natural gas futures contracts, Mr. Leeds would place a large order on the opposite side of the market, inducing traders to trade with his resting order. Once the resting order was hit, he would cancel his large order on the opposite side “often less than a second after it was entered.” In connection with this matter, Mr. Leeds agreed to pay a fine of US $40,000, submit to a 15-business day membership suspension and a CME Group products’ trading suspension from January 20 through February 9.

Mr. Leeds also agreed to a separate US $20,000 fine, another 15-day membership suspension and another CME Group products’ trading suspension from February 10 through March 3 in a different disciplinary action before a Nymex BCC. This matter arose because of allegations that Mr. Leeds, on “one or more occasions” between January and April 2013, entered orders during the pre-opening sessions of the natural gas futures contract “that were not for the purpose of executing bona fide transactions.” According to the BCC, “the entry and subsequent cancellation of these orders caused fluctuations in the publicly displayed Indicative Opening Price.”

Similarly, Michael Imperio resolved a disciplinary action before a Commodity Exchange, Inc. BCC where it was alleged that he entered “numerous” large orders in the silver futures contract “without the intent to trade” on multiple occasions from July through November 2013. According to the BCC, Mr. Imperio “entered these large orders to observe the market’s reaction and to encourage market participants to trade opposite his smaller iceberg orders that were resting on the opposite side of the book.” Mr. Imperio, allegedly, routinely cancelled his large orders within one second after his resting iceberg orders were executed. Mr. Imperio agreed to payment of a fine of US $60,000 and a four-week trading access suspension. (Iceberg orders—also sometimes called hidden quantity or maxshow orders—display on Globex only a portion of an order to the marketplace. After the displayed quantity is executed, another portion equal to the executed quantity is revealed as a new order at the bottom of the order book.)

Likewise, Jonathan Brims and Stephen Gola settled CBOT disciplinary actions where it was alleged that, while employees of a CBOT member firm from September 2011 through December 2012, they entered large orders in various CBOT financial futures contracts without the intent to trade “to create the appearance of an imbalance in buy/sell pressure.” They used this appearance, claimed the BCC, to have executed resting orders on the other side of the market. For these offenses, Mr. Gola agreed to pay a fine of US $65,000 while Mr. Brims agreed to remit a fine of US $50,000. Both Mr. Brims and Mr. Gola agreed to 10-business day CME Group products’ trading suspensions. Another employee—apparently of the same unnamed firm—was previously sanctioned for a similar offense (click here for details in the article, “CME Group Fines Trader for Spoofing-Type Offense,” in the November 17 to 21 and 24, 2014 edition of Bridging the Week.)

The conduct allegedly underlying the disciplinary actions against Mr. Leeds, Mr. Imperio, Mr. Brims and Mr. Gola occurred prior to CME Group’s adoption of its express prohibition against disruptive practices (Rule 575; click here to access) in September 2014. As a result, the respondents were charged with broad prohibitions against engaging in dishonorable or uncommercial conduct and/or acts detrimental to the interest or welfare of the exchange.

Pre-Execution Communications

In another matter, Sunil Arora agreed to pay a fine of US $60,000 and to a 30-business day CME Group products’ trading suspension, for crossing “numerous” buy and sell customer orders on CME Globex between January 2012 and May 2013 subsequent to pre-execution communications. According to the CME BCC, “in the majority of these instances,” Mr. Arora either did not enter a request for quote (RFQ) followed by a request for cross (RFC), or entered an RFQ or an RFC, but not both.

Wash Sales

Finally, Kaloti Jewellery International DMCC and Tarek El-Mdaka agreed to sanctions by Comex in connection with trades allegedly placed by Mr. El-Mdaka for one account of Kaloti, while directing other Kaloti traders to trade opposite him for another account of Kaloti. This trading was done, claimed the Comex BCC, to close out Kaloti positions at one clearing firm. The BCC “found that Mr. El-Mdaka failed to diligently supervise these traders in that he was not familiar with Exchange rules and directed them to engage in wash trades.” To resolve this matter, Kaloti agreed to pay a fine of US $30,000 and Mr. El-Mdaka, to pay a fine of US $10,000. Mr. El-Mdaka also agreed to a five-business day trading access suspension.

Compliance Weeds: Each of these actions points to the need for repetitive training to trading and operations staff regarding the nuances of exchange rules regarding position reporting and trading practices. Moreover, where certain noncompetitive trading is authorized by exchanges (e.g., block trades, exchange for related positions, pre-execution communications), traders must also often be reminded of the specific requirements of such authorizations. Violations of these requirements potentially violate not only the relevant exchange’s rules, but applicable law and rules of the Commodity Futures Trading Commission that prohibit noncompetitive transactions unless expressly done in accordance with approved exchange rules.

And briefly:

Culture and Ethics: Setting the right tone is more than the mechanical implementation of required rules and regulations. It is a direction from the board of directors and senior management that the standard of conduct is not just complying with the law, but complying with the spirit of the law to ensure that customers and counterparties are treated fairly, and that the reputation of the firm is constantly maintained if not enhanced. I have said it many times—the standard of conduct for all employees should be the “grandmother test:” don’t engage in conduct that would embarrass you if your grandmother read about it in the morning tabloid and later asked about it during breakfast! A very simple test! Remember: keep grandma proud!

Compliance Weeds: CME Group’s proposed rule amendments will conform the exchange’s prohibitions with those of the CFTC and ICE Futures U.S. The CME Group is currently unique in prohibiting under all circumstances bids or offers that if executed would cause a position limit violation. (Click here for more details in the article, “CME Sanctions Trader for Violating Position Limits Solely for an Offer to Sell” in the June 30 to July 4 and 7 edition of Bridging the Week.)

And even more briefly:

For more information, see:

Broker-Dealer Sanctioned by FINRA for Sharing Confidential Customer Information in Connection With a Class Action Lawsuit:

CFTC Approves Three Foreign Boards of Trade in Asia:

CME Group Adds Its View to “Skin in the Game” Debate:

CME Group Amends Rule Formally to Prohibit Intraday Violations of Position Limits; Eliminates Provision Dealing With Bids and Offers:

CME Group Clarifies Proper Practices for Handling Simultaneous Buys and Sells for Different Customers:

FCA Fines and Bans Two Former Senior Executives of Martin Brokers for Contributing to an Unsatisfactory Corporate Culture:

Foreign-Domiciled IBs Authorized to Use Local Accounting Principles in Connection With CFTC Financial Filings:

Futures Traders Sanctioned by CME Group Exchanges for Problematic Block Trades, ATS Breakdown, Disruptive Trading, Wash Trades and Other Violations:

Open Position Accounting:
Block Trades:

SEC and Two States Sanction S&P for Misconduct Related to Ratings of Commercial-Backed Securities:



Barbara Duka:

See also Duka v. SEC:

Massachusetts Attorney General:

NY Attorney General:’s-Over-CMBS-Credit-Ratings

SFC Provides Overview of HK Asset Management Industry:

Swiss Franc-Euro Decoupling Spurs Worldwide Legal and Regulatory Fallout:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of January 24, 2015. No representation or warranty is made regarding the accuracy of any statement or information in this article. Also, the information in this article is not intended as a substitute for legal counsel, and is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The impact of the law for any particular situation depends on a variety of factors; therefore, readers of this article should not act upon any information in the article without seeking professional legal counsel. Katten Muchin Rosenman LLP and/or Gary DeWaal may represent one or more entities mentioned in this article. Quotations attributable to speeches are from published remarks and may not reflect statements actually made.

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Gary DeWaal

Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office focusing on financial services regulatory matters. He provides advisory services and assists with investigations and litigation.

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