This morning, even before lunchtime in the US, the Chicago Mercantile Exchange publicized nine disciplinary actions against a cross section of clearing members and traders involving violations of its rules related to Exchange of Futures for Related Positions.
Five of the cases alleged that the respondent failed to maintain required documents supporting the EFRP; two cases claimed that the respondent failed to submit notice of the EFRP to the CME within times required by the Exchange; and two respondents were charged with violating both a prohibition against the same market participant being on both sides of an EFRP, as well as not maintaining required documents. In each matter, the CME alleged that, as a result of its EFRP rules not being followed, the relevant EFRP was not bona fide.
The filing of these disciplinary actions follows by almost four months the CME’s submission to the CFTC for its approval proposed revisions to its rules related to EFRPs (see article in Gary DeWaal's Bridging the Week: “CME Proposes Revised Rule Related to EFRPs: All Transitory EFRPs Will Be Banned, Except Those Related to FX Futures and Certain Inventory Financing” at http://www.garydewaalandassociates.com/?p=1323) , and by almost seven months, a Commodity Futures Trading Commission review of the CME that criticized the Exchange’s oversight of EFRP transactions (see, “Alphabet Soup under CFTC Scrutiny: CFTC Review of CME handling of EFRPs (EFPs, EFRs, and EOOs) Suggests Tougher Times for Traders and FCMs; Time to be Proactive!)” at http://www.garydewaalandassociates.com/?p=550).
All these CME disciplinary matters were resolved voluntarily by the respondents without admitting or denying the relevant rules' violation. The fines in these matters ranged from US $10,000 to US $35,000. The named respondents were: Britannic Trading Ltd.; Cooperatieve Centrale Raiffeisen-Boerenleenbank B.A. (Rabobank); Deutsche Bank AG; George E. Warren Co.; Guardian International Gold Corp.; Gulf Oil LP; Jefferies Bache Financial Services Inc.; Justin G. Martin; and Ronin Capital, LLC.
Compliance Weeds: It was inevitable and I predicted it here seven months ago: the Chicago Mercantile Exchange was going to feel obligated to crack down on EFRP transactions following its CFTC rule review published during August 2013 that was critical of the Exchange’s oversight. Now it has happened – eight firms and one individual have been fined for violating various provisions of the CME rules related to EFRPs.
CME EFRP transactions include EFPs (an Exchange of Futures for a corresponding cash market position), EFRs (an Exchange of Futures for a corresponding OTC swap or other OTC derivatives), and EOOs (an exchange of an exchange-trade options position for a corresponding OTC options position or an equivalent OTC contract). Normally EFRPs involve two different but related simultaneous transactions: one party is typically the buyer of the off-exchange market exposure and the seller of the related exchange contract, and the other party -- unrelated ordinarily from the first (but there are permitted exceptions) -- is typically the seller of the off-exchange market exposure and the buyer of the related exchange contract. The quantity covered by each leg of the related contracts must be approximately equal; there are specified documentation requirements related to such transactions; and notice of EFRP transactions must be submitted to the CME within prescribed times, depending on when they are consummated. In additon, clearing members are responsible under CME rules to exercise due diligence regarding the legitimacy of EFRP transactions processed for their customers. See, generally, CME Market Regulatory Advisory Notice (June 11, 2010): http://www.cmegroup.com/rulebook/files/RA1006-5.pdf.
As I recommended in August 2013, in response to the CME’s CFTC Rule Review, future commission merchants and their clients, should augment or implement internal compliance programs to ensure that all EFRP transactions they post comply with all applicable requirements. Sales and Operations staff that physically handle such transactions should be alerted to indicia that may indicate potential issues with EFRPs and set up a process for consultation with the firm’s Compliance Department in such circumstances. Periodically, firm’s Compliance or Internal Audit departments should review the firm’s adherence to relevant CFTC and contract market rules related to EFRPs.
For further information or assistance, contact Gary DeWaal and Associates at email@example.com.
For further information, see:
Cooperatieve Centrale Raiffeisen-Boerenleenbank (Rabobank):
George E. Warren Co:
Information not yet posted (available on request)
Guardian International Gold Corp:
Gulf Oil LP:
Jefferies Bache Financial Services Inc:
Justin G. Martin:
Ronin Capital, LLC:
The information contained in this article is not legal advice. For legal advice, please consult with your attorney. The information in this article is derived from sources believed to be reliable as of February 24, 2014, but no representation or warranty is made regarding the accuracy of any statement. To ensure compliance with requirements imposed by U.S. Treasury Regulations, Gary DeWaal and Associates LLC informs you that any U.S. tax advice contained in this communication (including any attachments) was not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Gary DeWaal and Associates may represent one or more entities mentioned in this article.
Gary DeWaal is currently Special Counsel with Katten Muchin Rosenman LLP in its New York office.
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CME Publicizes a Plethora of EFRP Fines Involving Incomplete Documentation, Late Submissions and Improper PartiesJump to: Compliance Weeds News Developments Between Bridges