United States: A Signal Of Things To Come? New CME Rule 512 Reflects Modified Stance For Violations Of Futures And Options Reporting Requirements

Last Updated: April 13 2015
Article by Athena Y. Eastwood, Jonathan H. Flynn, Neal E. Kumar, Mary Treanor and Gregory Mocek

Most Read Contributor in United States, October 2018

Introduction

On March 24, 2015, the CME Group, Inc. ("CME") announced a proposed amendment to Rule 512 indicating that it will impose a minimum fine of $1,000 for repeat violations of its exchanges' reporting rules for futures and options. The amendment, which became effective on April 7, 2015 and applies to all CME Group exchanges, reflects an increasingly strict approach taken by the Commodity Futures Trading Commission ("CFTC") and CFTC-regulated exchanges for technical violations of futures and options reporting.

Amended Scope of Rule 512

Amended Rule 512 requires all data and records that must be reported to the exchanges or CME Clearing to be submitted in an accurate, complete, and timely manner. This rule applies only to mandatory reporting of futures and options, including the following specific reporting requirements:

  • Reporting of block trades and exchange of futures for related position transactions;
  • Reporting of large trader, open interest, and long positions eligible for delivery (required of persons subject to CME's large trader reporting rule); and
  • Indicating specified information in all Globex order submissions, including:

    • The name of the customer;
    • Where there is an automated trading system (which automates the generation and routing of orders to Globex), the name of the operator or administrator (Tag 50); and
    • Whether the particular order is submitted manually or electronically (Tag 1028).

Prior to these amendments, Rule 512 provided the CME Chief Regulatory Officer ("CRO"), or a designee, with the discretion to issue a warning letter or impose a summary fine for an offense. However, under the new amendment, the CRO must impose fines on individuals or entities that violate a reporting requirement after a person or entity receives a warning letter for the same conduct within a 12-month period. This change was prompted by the CFTC's recent Rule Enforcement Review of CME, in which the CFTC recommended that the exchange impose minimum fines of at least $1,000 for Rule 512 violations. The CFTC asserted that $500 summary fines imposed by the exchanges during the review period were not "meaningful sanction[s]" or "sufficient to deter recidivist behavior."1 CME's amended Rule 512 adopts the CFTC guidance and provides that summary fines are now required for repeat violations within a rolling 12-month period and must be at least $1,000.2 Notably, consistent with the prior rule, fines may not exceed $5,000 per offense for individuals and $10,000 per offense for companies.

CME also indicated that it considers several factors in determining appropriate sanctions, including the scope of the reporting infraction, the party's disciplinary history for similar violations, and any remedial actions taken by the party to address the reporting issues. Yet this amended rule considerably reduces the CRO's discretion to levy a specific fine (or warning in lieu of a fine) in light of the specific facts and circumstances at hand. For example, where an individual or entity already has received one warning letter, but reports in good faith a technical, minor mistake within a 12 month period for the same offense, the CRO must impose a fine of at least $1,000. Furthermore, summary fines ordered pursuant to Rule 512 constitute formal CME disciplinary action that must be reported to the CFTC.

Recent Reporting Enforcement Actions

This amended rule aligns with the increasingly aggressive enforcement actions recently pursued by the CFTC and the CME for violations of reporting requirements, including relatively minor, technical violations. When the CFTC published its 2014 enforcement highlights, it expressly emphasized two cases, against J.P. Morgan Securities LLC and Multigrain SA, for futures and options reporting violations.3 Recent CFTC reporting violation enforcement actions include the following:

  • Multigrain SA and Agricola Xingu SA. In January 2014, the CFTC entered into a consent order with Multigrain SA and Agricola Xingu SA that levied a $500,000 penalty based on its finding that the companies failed to file or filed late Form 304 Reports related to their cotton purchases and sales, violating CFTC Regulation 19.02.4
  • J.P Morgan Securities LLC. The CFTC in July 2014 issued a consent order against J.P. Morgan Securities LLC that imposed a $650,000 penalty against the company for its alleged submissions of inaccurate large trader reports to the CFTC in violation of Section 4g(a) of the Commodity Exchange Act ("CEA") and CFTC Regulation 17.00(a)(1).5
  • Marubeni America Corporation. In March 2015, the CFTC entered into a consent order with Marubeni America Corporation that imposed an $800,000 penalty based on the CFTC's finding that the company submitted inaccurate monthly Form 204 Reports regarding fixed price cash grain purchases and sales, in violation of CFTC Regulation 19.01.6

During the last six months, the CME similarly pursued enforcement actions for technical violations of futures and options reporting requirements, including the following:

  • Goldman Sachs & Co. In October 2014, CME levied a $70,000 fine against Goldman Sachs & Co. for submitting late block trade reports on three occasions, in violation of CME Rule 526.F.7
  • Citigroup Global Markets. One month later, in November 2014, CME imposed a $50,000 fine on Citigroup Global Markets for various reporting violations, including late submissions of block trade reports, in violation of CME Rule 526.F.8

Potential Implications of Emerging Regulatory and Enforcement Trend

CME's proposed amendment to Rule 512, along with the recent enforcement actions pursued by the CFTC and the exchange for reporting violations, demonstrate an increased scrutiny of technical reporting violations. In the CFTC's press release announcing the J.P. Morgan settlement, the Director of Enforcement emphasized the importance of accurate reporting to "ensure the integrity of the regulatory structure and to maintain transparency in the markets."9 In addressing the CFTC's regulatory concerns, amended Rule 512 significantly reduces CME's discretion to determine an appropriate sanction in light of the facts and circumstances. It remains unclear if this approach, which removes the discretion to provide more lenient sanctions based on specific facts and circumstances, will be applied in the context of other types of reporting violations. Considering these recent developments, market participants should take steps now to ensure that they remain in compliance with the exchanges' and CFTC's reporting rules.

Footnotes

1. CFTC Division of Market Oversight, Audit Trail Rule Enforcement Review of the Chicago Board of Trade and the Chicago Mercantile Exchange at 17 (Nov. 21, 2014).

2. CME Group Market Regulation Advisory Notice, Summary Fines for Reporting Infractions, CME Group RA1503-5 (Mar. 24, 2015).

3. CFTC Releases Division's Annual Results (Oct. 24, 2013); CFTC Releases Annual Enforcement Results for Fiscal Year 2014 (Nov. 6, 2014).

4. In the Matter of Multigrain SA and Agricola Xingu SA, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, As Amended, Making Findings and Imposing Remedial Sactions, Dkt. No. 14-06 (Jan. 15, 2014).

5. In the Matter of J.P. Morgan Securities LLC, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, Dkt. No. 14-19 (Jul. 29, 2014).

6. In the Matter of Marubeni America Corporation, Order Instituting Proceedings Pursuant to Sections 6(c) and 6(d) of the Commodity Exchange Act, Making Findings and Imposing Remedial Sanctions, Dkt. No. 15-18 (Mar. 23, 2015).

7. Goldman Sachs & Co., Notice of Disciplinary Action, CME 10-04626-BC (Oct. 30, 2014). The CME also asserted that Goldman Sachs & Co. failed on two occasions to execute each leg of a futures spread block transaction at a single price, in violation of CME Rule 526.D. It further alleged that Goldman, upon realizing it failed to report a block trade within the requisite time, canceled the block trade and executed an identical trade with the customer, in violation of CME Rule 526.F.

8. CME Group, Citigroup Global Markets, Inc. Notice of Disciplinary Action, CME 10-4869-BC (Nov. 20, 2014). The CME also alleged that Citigroup reported inaccurate execution times of block trades and failed to maintain accurate written or electronic records of the block trade executions, in violation of CME Rule 536.A. In addition, it asserted that Citigroup failed on one occasion to execute each leg of a futures spread block transaction at a single price, in violation of CME Rule 526.D.

9. CFTC Release PR6968-14, CFTC Charges J.P. Morgan Securities LLC with Repeatedly Submitting Inaccurate Large Trader Reports and Imposes a $650,000 Civil Monetary Penalty (Jul. 29, 2014).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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