CME Settles a Number of Violations (Closeouts During Delivery Period, Breakdown of ATS Controls, EFRPs) (with DeWaal Comment)

The CME settled for relatively small penalties a number of discrete violations of its rules, but each settlement highlights important requirements that must be strictly adhered to.

1. In the first settlement, an FCM settled a CME disciplinary matter for payment of U.S. $10,000 related to its netting of offsetting positions in a physically delivered futures contract (i.e., soybean oil futures) on November 25, 2011, during a period of time (i.e., the delivery month and two days prior) when all such futures contracts ordinarily can be offset only through transactions executed in the market place. There is an exception to this requirement for bona fide clerical or operational errors corrected on the same day provided that the corrected amount does not exceed 1% of the relevant contract's open interest. However, this exception was not applicable here.
2. In another disciplinary matter, the principal of a trading firm agreed not to access the CME's electronic trading or clearing platforms or the CME trading floor for 10 days because the automated trading system of the firm malfunctioned for two minutes on August 5, 2011, and entered numerous self-matched trades in the September 2011 Five-year Treasury Note futures contract during that period. The system malfunctioned because of a programming error by a contractor employed by the trading firm.
3. And finally, in a reminder that the CME expects all elements of its EFRP (exchange of futures for related positions) rules to be followed, an end-user client agreed to pay a fine of U.S. $15,000 for entering into the futures leg of an EFR (exchange of futures for risk) transaction on February 3, 2012 involving November 2012 lumber futures, but not a corresponding OTC swap or other OTC instrument. In connection with EFRPs (of which EFRs are a type), the party who is the buyer or seller of the relevant futures contract must have the opposite position (i.e., seller or buyer) of the related position or opposite market exposure (i.e., short or long).

DeWaal Comment: Years ago, each of the above incidents would be dismissed as "costs of doing business." However those days are gone. Although the events are isolated, all compliance incidents, no matter how small, should be evaluated to ensure that a firm understands what gave rise to the incident, what events could occur to give rise to a similar incident, and what controls a firm has or needs to develop to minimize the likelihood of a similar incident reoccurring.

See: CME Disciplinary Actions: Barclays, Kenneth Bell and West Fraser Mills.The summary and comment were provided by Gary DeWaal, President of Gary DeWaal Associates LLC.