Bridging the Week by Gary DeWaal: July 20 - 24 and 27, 2015 (27 Enforcement Actions; More MF Global; Lawyer Settles with CFTC; Dodd-Frank Five Years Later)

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Published Date: July 26, 2015

Twenty-seven disciplinary proceedings brought by the CME Group – touching upon EFRPs, transfer trades, money passes, position limits, block trades and disruptive practices – provided an abrupt reminder that a failure to comply with relatively technical rules can result in fines as well as corporate distraction while employees address regulatory inquiries and actions. Moreover, the book on the fate of customers, secured creditors and unsecured creditors of MF Global, Inc., the defunct FCM that went belly-up in 2011, appears to be finally closing with a relatively good outcome under the circumstances. As a result, the following matters are covered in this week’s edition of Bridging the Week:

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Article Version:

FC Stone Companies and Goldman Sachs Receive Largest Fines in CME Group’s 27 Disciplinary Actions Cascade:

CME Group handed down sanctions in 27 separate disciplinary actions last week for alleged violations of rules related to exchange for related positions, transfer trades, money passes, position limits, block trades and disruptive practices.

Wholly owned subsidiaries of INTL FC Stone Inc., including INTL FC Stone Markets LLC and INTL Commodities, Inc., received the largest number of individual sanctions (eight) and total fines (US $160,000). Generally, the entities were charged by CME Group exchanges with violating rules related to EFRPs, typically by having no or insufficient documentation for the related position component of the EFRP  (e.g., cash, swap) or, in one case, by not transferring ownership of the related position. The alleged violations occurred on various dates in 2013 and 2014. With limited exception for EFRPs involving foreign exchange, all EFRPs on CME Group must involve the bona fide transfer of a related position from one party to another documented in accordance with market custom.

Gavilon, LLC also was fined US $15,000 by the Chicago Board of Trade for allegedly violating its EFRP rules. According to the CBOT, on March 7, 2013, Gavilon supposedly sold an OTC put swaption contract opposite another party, and then entered into an exchange-traded wheat calendar spread put option through an exchange of options for options transaction against the same opposite party. The EOO liquidated the first swaption, leaving Gavilon with a long futures position. The CBoT claimed this was a transitory EFRP, which is prohibited under CME Group rules.

Goldman Sachs Execution & Clearing, LP was sanctioned US $110,000 by the Commodity Exchange, Inc., for allegedly facilitating the transfer of gold futures and options positions between two customers with different beneficial ownership without exchange approval on February 27, 2013. A CME Group exchange must approve the transfer of positions between accounts of different beneficial owners when the transfer is in connection with a merger, asset purchase, consolidation or other non-repetitive transaction between two or more entities.

Kanat Khussainov was sanctioned US $35,000 in total by each of the four CME Group exchanges in connection with an alleged money pass from an account owned by his employer to his own account. According to CME Group, Khussainov organized this transfer through 23 round-turn transactions across the four exchanges between May 27 and 30, 2014. CME Group prohibits executing transactions to transfer equity between accounts. In connection with this matter, Mr. Khussainov was also prohibited from trading any CME Group products for 10 business days.

Chopper Trading LLC was fined US $25,000 by the Chicago Board of Trade for allegedly violating position limits on the July 2014 corn futures contract on June 30, 2014, apparently for less than 12 minutes. Similarly, the Pacific Investment Management Company, LLC was fined US $35,000 by the CBoT for supposedly violating a single month and all months position limits in the soybean meal futures contract on two consecutive business days in November 2014; it liquidated the violative positions on the following business day.

Newedge USA, LLC was sanctioned US $20,000 in two separate matters for allegedly not reporting a few block trades within required time frames on a few occasions from 2010 through 2012, and, in one of the matters, for also not reporting accurate execution times.

Finally, James Groth was fined US $55,000 and prohibited from trading any CME Group products for 10 business days for allegedly engaging in conduct that the exchange likely considered “spoofing.” CME Group claimed it found a pattern of trading from May through October 2011 where Mr. Groth placed a smaller order on one side of the market while subsequently entering multiple larger orders on the opposite side of the market at or near the best bid or offer. The exchange’s disciplinary panel found that Mr. Groth “entered these large orders for the purpose of inducing other market participants to trade opposite his smaller resting orders.” CME Group requires that all orders be entered for the purpose of executing bona fide transactions.

Each of these matters was resolved voluntarily by settlement by the respondent.

Compliance Weeds: Exchange for related position transactions and block trades are subject to strict rules governing the lawful parties to such transactions, how such transactions must be executed and documented, and by when and how such transactions must be reported. Traders must be reminded of these rules frequently and follow them meticulously. Violations of relevant exchange rules render the transactions non-bona fide and may constitute unlawful non-competitive trades under applicable rules of the Commodity Futures Trading Commission. (Click here for a somewhat dated overview of the requirements EFRPs in the article “Alphabet Soup Under CFTC Scrutiny: CFTC Review of CME Handling of EFRPs (EFPs, EFRs, and EOOs) Suggest Tougher Times for Traders and FCMs – Time to Be Pro-active” in the August 6, 2013 edition of Between Bridges. Click here for more recent articles in block trades and EFRPs in the category “Block Trades and EFRPs” on the website.)


My View: It is very good that the financial repercussions of the collapse of MF Global Inc. on customers and creditors appear likely to be mostly resolved by year-end. However, this resolution does not lessen the near-hysteria experienced by customers and creditors that followed in the days immediately following the demise of the firm –a demise apparently instigated by an apparently unanticipated regulatory capital treatment related to proprietary investments and the catastrophic breakdown of systems and controls. The collapse of MF Global in 2011 and Peregrine Financial Group less than one year later prompted the adoption of new rules by the Commodity Futures Trading Commission aimed at enhancing the protection of customer funds. Although industry participants (including me) can quibble on whether all these new rules were necessary or are entirely effective or whether, in fact, there are better alternatives, overall the new rules have likely achieved their objective of making customer funds safer, albeit at substantially increased costs to futures commission merchants.

My View: Perhaps because I was very busy, somehow last week I missed the toasts and parties celebrating the five-year anniversary of the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Many of the objectives of Dodd-Frank and the equivalent laws of many international jurisdictions regarding the handling of over-the-count derivatives transactions are laudable and addressed material weaknesses in the system that contributed to the 2008-9 financial crisis. However, the failure of international lawmakers and regulators to better coordinate their responses and to consider holistically the implication of their overly proscriptive laws and rules threatens to decrease and fragment market liquidity, ultimately hurting the ability of end users to effectively mitigate their risks. ISDA is an industry organization, acts for the self-interest of its members and, as a result, at least some lawmakers and regulators may be skeptical of its suggested areas of focus in its publication on Dodd-Frank released last week. However, if anything, ISDA’s recommended areas of focus are understated and are all topics that must be addressed to ensure the continued effectiveness of important markets and the viability of their participants.

And more briefly:

For more information, see:

CFTC Exempts CTAs Not Directing the Trading of Client Accounts From Certain Filing Requirements:

Defunct FCM MF Global to Pay Unsecured Creditors up to 95% of Their Allowed Claims:
Press release and court papers at:

ESMA Publishes New Q&As on AIFMD:

FC Stone Companies and Goldman Sachs Receive Largest Fines in CME Group’s 27 Disciplinary Actions Cascade (Sample Disciplinary Actions):

FC Stone Entities:
Gavilon, LLC:
Goldman Sachs Execution & Clearing L.P.:
Kanat Khussainov:
Newedge USA, LLC:
Pacific Investment Management Company LLC:

FinCEN Updates List of Jurisdictions With Material AML/CFT Deficiencies:

Florida Lawyer Settles CFTC Complaint Charging He Aided and Abetted His Clients’ Unlawful Precious Metals Schemes:

ISDA Reflects on Dodd-Frank Implementation Five Years Later:
Press release and article found at:

optionsXpress Sanctioned by FINRA for Not Adjusting Open Share Orders to Reflect Dividends:

Three Industry Organizations Warn of Potential Negative Impact of Extending Capital Requirements to European Commodity Dealers:

The information in this article is for informational purposes only and is derived from sources believed to be reliable as of July 25, 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 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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