DISCIPLINARY PROGRAM
RULE ENFORCEMENT REVIEW
OF
CBOT, CME, COMEX, AND NYMEX
Division of Market Oversight
November 30, 2017
2
RULE ENFORCEMENT REVIEW OF
THE CBOT, CME, COMEX, AND NYMEX
DISCIPLINARY PROGRAM
Commodity Futures Trading Commission – Division of Market Oversight
Table of Contents
I. Rule Enforcement Review Scope.......................................................................................... 3
II. Summary of Findings, Recommendations, and Deficiencies ......................................... 5
A. Findings without Recommendations or Deficiencies .................................................. 5
B. Findings with Recommendations .................................................................................. 6
III. Appendix A ......................................................................................................................... 9
3
I. Rule Enforcement Review Scope
The Division of Market Oversight (“Division”) has completed a rule enforcement review
of the disciplinary program of the Chicago Board of Trade (“CBOT”), the Chicago Mercantile
Exchange (“CME”), the Commodity Exchange, Inc. (“COMEX”), and the New York Mercantile
Exchange, Inc. (“NYMEX”) (collectively, the “Exchanges”), wholly-owned subsidiaries of CME
Group, Inc. (“CME Group”).
1
The Division’s review of the Exchanges’ disciplinary program
covered the period from July 15, 2015 to July 15, 2016 (“target period”). The Division reviewed
the Exchanges’ compliance with Core Principle 13 (Disciplinary Procedures)
2
under Section
5(d) of the Commodity Exchange Act (“Act” or “CEA”),
3
and the Commission’s related
regulations codified in Commission regulations 38.700–712, which relate to an exchange’s
disciplinary procedures.
To evaluate the Exchanges’ disciplinary program, and their compliance with Core
Principle 13 and Commission regulations 38.700–712, Division staff interviewed compliance
officials and staff from CME Group’s Market Regulation Department (“MRD”), which provides
compliance, enforcement, and other self-regulatory services to the Exchanges, pursuant to
1
The Division’s rule enforcement reviews seek to present an analysis of an exchange’s overall compliance
capabilities during the period under review. Such reviews target those programs directly addressed in the review
and do not assess all programs or core principles. The Division’s analyses, conclusions, and recommendations are
based, in large part, upon the Division’s evaluation of a sample of investigations and other exchange documents.
This evaluation process, in some instances, identifies specific deficiencies in particular exchange investigations or
methods but is not designed to uncover all instances in which an exchange does not effectively address all exchange
rule violations or other deficiencies.
The findings and recommendations in this rule enforcement review are limited to the Exchanges and their products.
This rule enforcement review, and the findings and recommendations herein, represent the view of the Division
only, and do not necessarily represent the position or view of the Commission or of any other office or division of
the Commission.
2
Core Principle 13 - Disciplinary Procedures: The board of trade shall establish and enforce disciplinary procedures
that authorize the board of trade to discipline, suspend, or expel members or market participants that violate the rules
of the board of trade, or similar methods for performing the same functions, including delegation of the functions to
third parties.
3
7 U.S.C. 1 et seq.
4
Regulatory Services Agreements. The Division also analyzed responsive documents produced
by the Exchanges’ staff, including the following:
• disciplinary case logs and files;
• organizational charts and summaries of personnel and staffing;
• summaries of procedures designed to prevent conflicts of interest;
• minutes of disciplinary committees, Floor Conduct Committee, Board of
Directors, Executive Committee, and Market Regulation Oversight Committee
(“MROC”) meetings held during the target period; and
• compliance procedures manuals and handbooks, disciplinary rules, and other
overviews of MRD’s disciplinary procedures.
The Division analyzed the Exchanges’ disciplinary program to determine whether the
program is in compliance with the core principle and Commission regulations stated above, and
whether there are any deficiencies or recommendations for the program. For purposes of this
report, a deficiency is an area where the Division believes an exchange is not in compliance with
a Commission regulation and must take corrective action and a recommendation concerns an
area where the Division believes the exchange should improve its compliance program.
4
Positively, the Division found that the Exchanges maintain experienced enforcement staff and a
generally adequate disciplinary program to demonstrate compliance with Core Principle 13 and
Commission regulations 38.700–709 and 38.711. However, the Division made four
recommendations relating to compliance with Commission regulation 38.710, and one
recommendation relating to compliance with Commission regulation 38.712.
4
The Division notes that MRD is primarily responsible for administering each Exchanges’ disciplinary program.
Therefore, any recommendation or deficiency related to MRD is a recommendation or deficiency that applies to all
of the Exchanges.
5
The Division provided the Exchanges with an opportunity to review and comment on a
draft of this report on October 16, 2017. On October 24, 2017, Division staff conducted an exit
conference with the Exchanges’ officials to discuss the report’s findings and recommendations.
II. Summary of Findings, Recommendations, and Deficiencies
A. Findings without Recommendations or Deficiencies
1. Enforcement Staff (Commission regulation 38.701)
• The Enforcement Group (“Enforcement Group” or “Enforcement”) is
responsible for prosecuting all disciplinary cases for the Exchanges. The
Enforcement Group is led by an experienced management team that includes a
Global Enforcement Counsel in New York and two regional Enforcement
Counsels, one in New York and one in Chicago. During the target period, the
Enforcement Group consisted of 13 Enforcement Attorneys.
2. Core Principle 13 (Commission regulation 38.700); Disciplinary Panels
(Commission regulation 38.702); Notice of Charges (Commission regulation
38.703); Right to Representation (Commission regulation 38.704); Answer to
Charges (Commission regulation 38.705); Denial of Charges and Right to
Hearing (Commission regulation 38.706); Hearings (Commission regulation
38.707); Decisions (Commission regulation 38.708); and Final Decisions
(Commission regulation 38.709).
• The Division found that the Exchanges have sufficient disciplinary program
rules and procedures to demonstrate compliance with Core Principle 13 under
Section 5(d) of the CEA, and Commission regulations 38.700, 38.702–709.
The Exchanges’ rules are designed to ensure due process for disciplinary
proceedings, and give the Exchanges the authority to discipline, suspend, or
permanently bar members or market participants found to have committed
rule violations.
3. Disciplinary Sanctions (Commission regulation 38.710)
• The Division reviewed 85 of the 151 closed disciplinary cases (18 for CBOT,
33 for CME, nine for COMEX, 16 for NYMEX, and nine for multiple CME
Group Exchanges) and found that, subject to the recommendations below
relating to Commission regulation 38.710 and with the exception of fines that
were reduced due to respondents’ claim of financial hardship, sanctions
imposed during the target period were reasonable relative to the violations
alleged and the evidence presented. In addition, the Division found that the
Exchanges’ Business Conduct Committees (“BCC”) consistently considered
6
the respondent’s disciplinary history and any customer harm when
determining sanctions.
• In the 85 closed cases reviewed by the Division, the Exchanges assessed a
total of 80 fines in 63 cases. The imposed fines totaled $4,307,500, ranging
from $5,000 to $300,000. The Exchanges also assessed a total of $7,935,470
in disgorgement from 17 respondents, ranging from $1,787.50 to $2,938,545.
In addition, the Exchanges ordered four respondents to pay a total of $287,536
in customer restitution; issued suspensions for 63 individuals ranging from 15
days to eight years; and imposed permanent bars on membership against ten
respondents.
5
4. Warning Letters (Commission regulation 38.711)
• The Division found that the Exchanges’ maintain a warning letter policy
prohibiting the issuance of more than one warning letter per rolling 12-month
period for the same violation, as required by Commission regulation 38.711.
Of the 85 cases reviewed by the Division, the Enforcement Group issued a
total of 17 warning letters in 12 cases. None of the warning letter recipients
received more than one warning letter during the target period for the same
violation.
B. Findings with Recommendations
1. Disciplinary Sanctions (Commission regulation 38.710)
• The Exchanges issued two types of suspensions during the target period: (1)
suspensions of all direct and indirect access to the trading floor or electronic
trading or clearing platform (“direct and indirect access suspensions”); and (2)
suspensions of direct access to the trading floor or electronic trading or
clearing platform (“direct access-only suspensions”). Of the 63 suspensions
issued during the target period, 55 were direct and indirect access suspensions,
while eight were direct access-only suspensions.
• The Division reviewed the seven cases that resulted in eight direct access-only
suspensions and found that MRD did not document or explain how the facts
and circumstances of these cases supported the issuance of direct access-only
suspensions, or the factors MRD considered in determining the appropriate
length of the direct access-only suspensions.
• Recommendation: MRD should document and explain each instance
where it recommends or supports the issuance of a direct access-only
suspension. Such explanation should articulate the specific facts and
5
MRD defines disgorgement as illicit profits returned to the Exchanges by the respondent and restitution as payment
to a party financially injured by the respondent’s actions.
7
circumstances of the case that support the issuance of a direct access-
only suspension, and how MRD determined the appropriate length of
the suspension term.
• The Exchanges largely rely on futures commission merchants (“FCMs”) to
ensure that suspended individuals do not electronically access the Exchanges.
The Exchanges can conduct ad hoc queries of “Tag 50 IDs” to identify
whether any Tag 50 IDs associated with suspended individuals are trading, but
such queries are not done on a routine basis.
• Recommendation: The Exchanges should either monitor for
prohibited trading activity by suspended individuals or firms, such as
trading by Tag 50 IDs that belong to suspended individuals, or
establish a rule explicitly requiring FCMs to monitor for such activity.
• In certain cases, Enforcement takes into account a respondent’s financial
condition in supporting a lesser financial penalty. The Division reviewed five
cases during the target period in which financial condition was considered and
found that Enforcement did not clearly articulate how it determined the
appropriate sanction based on the circumstances.
• Recommendation: The Exchanges should document and explain how
they determine the appropriate sanction where a respondent’s
financial condition justifies a lesser financial penalty.
• Of the 85 disciplinary cases reviewed by the Division, warning letters were
issued to 17 respondents in 12 cases. In addition to reviewing those 12 cases,
the Division selected for further review 10 cases, four complaints, and 14
research files in which warning letters were issued during the target period. In
total, the Division found that in three cases, two complaints and one research
file, the Exchanges should have taken disciplinary action in lieu of issuing a
warning letter.
• Recommendation: The Exchanges should take appropriate
disciplinary action in lieu of issuing a warning letter in future cases
that involve misconduct similar to the cases that were identified by the
Division in this Report.
2. Additional Sources for Compliance (Commission regulation 38.712)
• The Exchanges maintain minutes for each BCC meeting. For each case listed
on the agenda, the minutes indicate whether a settlement offer was accepted
by the BCC. The minutes do not capture any additional detail regarding the
BCC’s decision to accept or reject the settlement offer. For settlement offers
that are accepted by the BCC, the Panel’s rationale for accepting the offer is
based on the factors set forth in the MRD Supporting Memo, and is therefore
8
documented. However, if the BCC decides to reject a settlement offer
recommended by Enforcement, the rationale for this decision is not
documented anywhere in the case file, either while the matter is pending or
once it has been resolved, by either Enforcement or the BCC.
• Recommendation: The Exchanges should ensure that the BCC’s
rationale for rejecting a settlement offer is documented. Such
documentation may be completed once the matter has been resolved
and after the appeal period for the matter has lapsed.
Additional details regarding the facts and analysis relevant to the Division’s review are
contained in the Compliance Matrix in Appendix A.
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III. Appendix A
Compliance Matrix
CFTC Regulation
Findings Regarding the Exchanges’ Compliance
Target Period 7/15/15 – 7/15/16
Core Principle 13 – Disciplinary Procedures
§ 38.700 Core Principle 13
Th
e board of trade shall establish and
enforce disciplinary procedures that
authorize the board of trade to
discipline, suspend, or expel
members or market participants that
violate the rules of the board of trade,
or similar methods for performing the
same functions, including delegation
of the functions to third parties.
The Division found that the Exchanges maintain adequate
disciplinary procedures to investigate potential rule violations,
prosecute cases, and discipline members or market participants who
are found to have violated the Exchanges’ rules.
§ 38.701 Enforcement Staff
A designated contract market must
establish and maintain sufficient
enforcement staff and resources to
effectively and promptly prosecute
possible rule violations within the
disciplinary jurisdiction of the
contract market. A designated
contract market must also monitor the
size and workload of its enforcement
staff annually, and ensure that its
The Enforcement Group (“Enforcement Group” or “Enforcement”),
within CME Group’s Market Regulation Department (“MRD”), is
responsible for prosecuting all disciplinary cases and is led by an
experienced management team that includes a Global Enforcement
Counsel in New York and two regional Enforcement Counsels, one
in New York and one in Chicago. During the target period, the
Enforcement Group consisted of 13 Enforcement Attorneys.
7
To determine whether the Enforcement Group maintains sufficient
staff to promptly prosecute possible rule violations, the Division
6
This column contains: (1) deficiency findings where the Division believes the Exchange was not in compliance with a Commission regulation and must take
corrective action and (2) recommendations where the Division identifies areas for improvement.
7
The Executive Director and the two regional Directors have management responsibilities but also serve as Enforcement Attorneys; therefore, they are included
in the Enforcement Attorney total. The Division notes that this is an increase from the staffing levels observed during the November 21, 2014 CME Group
Disciplinary RER, which covered the target period of April 1, 2012 to March 31, 2013.
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enforcement resources and staff are at
appropriate levels. The enforcement
staff may not include either members
of the designated contract market or
persons whose interests conflict with
their enforcement duties. A member
of the enforcement staff may not
operate under the direction or control
of any person or persons with trading
privileges at the contract market. A
designated contract market's
enforcement staff may operate as part
of the designated contract market's
compliance department.
reviewed 85 of the 151 disciplinary cases closed during the target
period (18 for CBOT, 33 for CME, nine for COMEX, 16 for
NYMEX, and nine for multiple CME Group Exchanges). Of the
85 reviewed cases, 39 cases were closed in less than 12 months, 29
cases took between 12 and 24 months to close and 15 cases took
more than 24 months to close. The Division found there were
mitigating circumstances that justified the delay in these cases,
such as complex fact patterns and multiple respondents.
§ 38.702 Disciplinary Panels
A designated contract market must
establish one or more disciplinary
panels that are authorized to fulfill
their obligations under the rules of
this subpart. Disciplinary panels must
meet the composition requirements of
part 40 of this chapter, and must not
include any members of the
designated contract market's
compliance staff or any person
involved in adjudicating any other
stage of the same proceeding.
Each of the Exchanges maintains two disciplinary panels, a
Probable Cause Committee (“PCC”) and a Business Conduct
Committee (“BCC”). The PCC receives and reviews investigation
reports prepared by MRD and determines whether there is a
reasonable basis for finding that a violation of exchange rules may
have occurred which warrants the issuance of charges. The BCC is
responsible for conducting settlement hearings and contested
hearings based on charges issued by the PCC. Each committee is
composed of five people: a panel chair, two exchange members (or
employees of exchange member firms), and two non-members. At
least one of the exchange member panelists must be from the
exchange where the case originated.
8
§ 38.703 Notice of Charges
If compliance staff authorized by a
designated contract market or a
designated contract market
The Division found that the notice of charges issued during the
target period adequately provided the elements required by
Commission regulation 38.703. If a PCC Panel decides to issue
charges, it directs the Enforcement Group to issue a notice of
8
CBOT, CME, COMEX, and NYMEX Rules 402.A and 406.
11
disciplinary panel determines that a
reasonable basis exists for finding a
violation and that adjudication is
warranted, it must direct that the
person or entity alleged to have
committed the violation be served
with a notice of charges and must
proceed in accordance with the rules
of this section. A notice of charges
must adequately state the acts,
conduct, or practices in which the
respondent is alleged to have
engaged; state the rule, or rules,
alleged to have been violated (or
about to be violated); and prescribe
the period within which a hearing on
the charges may be requested. The
notice must also advise that the
charged respondent is entitled, upon
request, to a hearing on the charges.
charges stating, among other things, the conduct in which the
respondent is alleged to have engaged, as well as the alleged rule
violations. The notice of charges also advises the respondent that
the matter will be heard by a BCC Panel and includes the time and
place of the hearing.
9
§ 38.704 Right to
Representation
Upon being served with a notice of
charges, a respondent must have the
right to be represented by legal
counsel or any other representative of
its choosing in all succeeding stages
of the disciplinary process, except
any member of the designated
contract market's board of directors
or disciplinary panel, any employee
of the designated contract market, or
any person substantially related to the
Notice of charges issued by the Enforcement Group state that the
respondent has the right to be represented by legal counsel. In
addition, the Exchanges’ procedures and rules also address the
respondent’s right to counsel.
10
9
CBOT, CME, COMEX, and NYMEX Rule 407.B.
10
CBOT, CME, COMEX, and NYMEX Rules 407.B and 408.A.
12
underlying investigations, such as
material witness or respondent.
§ 38.705 Answer to Charges
A respondent must be given a
reasonable period of time to file an
answer to a notice of charges. The
rules of a designated contract market
governing the requirements and
timeliness of a respondent's answer to
charges must be fair, equitable, and
publicly available.
Notice of charges issued by the Enforcement Group give the
respondent 21 days to answer the notice. In addition, the answer
period and procedures governing the respondent’s answer to
charges are publicly disclosed in the Exchanges’ rulebooks.
11
§ 38.706 Denial of Charges
and Right to Hearing
In every instance where a respondent
has requested a hearing on a charge
that is denied, or on a sanction set by
the disciplinary panel, the respondent
must be given an opportunity for a
hearing in accordance with the
requirements of §38.707 of this part.
The Exchanges’ rules provide for a hearing on charges that are
denied.
12
The Division did not identify any instances during the
target period where a respondent’s request for a hearing was
denied.
§ 38.707 Hearings
(a) A designated contract market
must adopt rules that provide for the
following minimum requirements for
any hearing conducted pursuant to a
notice of charges:
(1) The hearing must be fair, must be
Disciplinary hearings are conducted in accordance with the
Exchanges’ rules:
• Hearings are held before members of the BCC. No formal
rules of evidence apply, but hearings are structured and
must be fair.
13
• The respondent may request and review, in advance of the
hearing, records or other evidence in possession of the
Exchanges.
14
11
CBOT, CME, COMEX, and NYMEX Rule 407.C.
12
CBOT, CME, COMEX, and NYMEX Rule 407.B and C.
13
CBOT, CME, COMEX, and NYMEX Rule 408.
13
conducted before members of the
disciplinary panel, and must be
promptly convened after reasonable
notice to the respondent. The formal
rules of evidence need not apply;
nevertheless, the procedures for the
hearing may not be so informal as to
deny a fair hearing. No member of
the disciplinary panel for the matter
may have a financial, personal, or
other direct interest in the matter
under consideration.
(2) In advance of the hearing, the
respondent must be entitled to
examine all books, documents, or
other evidence in the possession or
under the control of the designated
contract market. The designated
contract market may withhold
documents that are privileged or
constitute attorney work product,
documents that were prepared by an
employee of the designated contract
market but will not be offered in
evidence in the disciplinary
proceedings, documents that may
disclose a technique or guideline used
in examinations, investigations, or
enforcements proceedings, and
documents that disclose the identity
• Enforcement Group staff participates in the hearings and
presents the case at each hearing.
15
• Respondents are entitled to appear personally and may call
and cross-examine witnesses.
16
• The Exchanges maintain rules that require persons within
their jurisdiction who are called as witnesses to participate
in the hearing and produce any evidence they may have.
17
• All hearings are recorded and such recordings may be
requested by the respondent. If a transcript is requested, the
respondent is responsible for the cost of producing the
transcript.
18
14
CBOT, CME, COMEX, and NYMEX Rule 408.B.
15
CBOT, CME, COMEX, and NYMEX Rule 408.D.
16
CBOT, CME, COMEX, and NYMEX Rule 408.D.
17
CBOT, CME, COMEX, and NYMEX Rules 408.A and 418.
18
CBOT, CME, COMEX, and NYMEX Rule 408.D.
14
of a confidential source.
(3
) The designated contract market's
enforcement and compliance staffs
must be parties to the hearing, and
the enforcement staff must present
their case on those charges and
sanctions that are the subject of the
hearing.
(4)
The respondent must be entitled
to appear personally at the hearing,
must be entitled to cross-examine any
persons appearing as witnesses at the
hearing, and must be entitled to call
witnesses and to present such
evidence as may be relevant to the
charges.
(5) The designated contract market
must require persons within its
jurisdiction who are called as
witnesses to participate in the hearing
and to produce evidence. It must
make reasonable efforts to secure the
presence of all other persons called as
witnesses whose testimony would be
relevant.
(6) If the respondent has requested a
hearing, a copy of the hearing must
be made and must become a part of
the record of the proceeding. The
record must be one that is capable of
being accurately transcribed;
however, it need not be transcribed
unless the transcript is requested by
Commission staff or the respondent,
the decision is appealed pursuant to
the rules of the designated contract
15
market, or is reviewed by the
Commission pursuant to section 8c of
the Act or part 9 of this chapter. In all
other instances a summary record of
a hearing is permitted.
(b) [Reserved]
§ 38.708 Decisions
Promptly following a hearing
conducted in accordance with
§38.707 of this part, the disciplinary
panel must render a written decision
based upon the weight of the
evidence contained in the record of
the proceeding and must provide a
copy to the respondent. The decision
must include:
(a)
The notice of charges or a
summary of the charges;
(b
) The answer, if any, or a summary
of the answer;
(c)
A summary of the evidence
produced at the hearing or, where
appropriate, incorporation by
reference of the investigation report;
(d) A
statement of findings and
conclusions with respect to each
charge, and a complete explanation
of the evidentiary and other basis for
such findings and conclusions with
respect to each charge;
(e) An indication of each specific rule
that the respondent was found to have
violated; and
The Division found that the BCC promptly rendered written
decisions following hearings during the target period. The Division
also found that each BCC decision for the five contested and 10
default hearings reviewed by the Division included a summary of
the charges, any answer by a respondent, a summary of the
evidence produced at the hearing, a statement of findings and an
explanation regarding the basis for such findings, the specific
rule(s) violated by the respondent, and a declaration of the
sanctions imposed against the respondent.
16
(f) A declaration of all sanctions
imposed against the respondent,
including the basis for such sanctions
and the effective date of such
sanctions.
§ 38.709 Final Decisions
Each designated contract market
must establish rules setting forth
when a decision rendered pursuant to
this section will become the final
decision of such designated contract
market.
A respondent who is found guilty of an offense or is otherwise
aggrieved by a decision of or sanction imposed by the BCC may
appeal to a hearing panel of the Board of Directors within 10 days
of receiving notice of the decision or sanction, provided that the
sanction imposed is greater than $10,000 or a five-day suspension.
In addition, MRD may appeal a BCC decision or sanction, or a
PCC decision not to issue requested charges, to a hearing panel of
the Board within 10 days of receiving notice of the decision. Board
hearing panels consist of a director appointed by the Chairman of
the Board to serve as chairman of the panel, and two additional
directors, one of whom must be a non-member. Appellate Panel
decisions are deemed a decision of the Board and are the final
decision of the exchange.
19
§ 38.710 Disciplinary
Sanctions
All disciplinary sanctions imposed by
a designated contract market or its
disciplinary panels must be
commensurate with the violations
committed and must be clearly
sufficient to deter recidivism or
similar violations by other market
Fines, Restitution and Disgorgement Levied During the Target
Period
The Exchanges closed 151 disciplinary cases (a majority of which
were resolved via settlement agreement). The Division reviewed
85 of the 151 closed disciplinary cases and found that, with the
exception of fines that the Exchanges’ reduced due to respondents’
claim of financial hardship,
20
fines imposed during the target period
were reasonable relative to the violations alleged and the evidence
19
CBOT, CME, COMEX, and NYMEX Rule 411. On December 14, 2016, the Exchanges increased the threshold for an appeal to $25,000 or a 10-day
suspension.
20
See discussion below regarding Financial Condition.
17
participants. All disciplinary
sanctions, including sanctions
imposed pursuant to an accepted
settlement offer, must take into
account the respondent's disciplinary
history. In the event of demonstrated
customer harm, any disciplinary
sanction must also include full
customer restitution, except where
the amount of restitution, or to whom
it should be provided, cannot be
reasonably determined.
presented. In addition, the Division found that the Exchanges’
BCC consistently considered the respondent’s disciplinary history
and any customer harm when determining sanctions. In the 85
cases reviewed by the Division, the Exchanges assessed a total of
$4,307,500 in fines ranging from $5,000 to $300,000.
• CBOT Fines totaled $540,000 and ranged from $5,000 –
$100,000.
• CME Fines totaled $1,480,000 and ranged from $5,000 –
$125,000.
• COMEX Fines totaled $855,000 and ranged from $5,000 –
$175,000.
• NYMEX Fines totaled $1,432,500 and ranged from $7,500
– $300,000.
In addition, the Exchanges ordered four respondents to pay a total
of $287,536 in customer restitution; and assessed $7,935,470 in
disgorgement ranging from $1,787.50 to $2,938,545.
Suspensions Issued During the Target Period
The Exchanges issued suspensions for 63 individuals ranging from
15 days to eight years; and imposed permanent bars on membership
against 10 respondents. The Exchanges issued two types of
suspensions: (1) suspensions of all direct and indirect access to the
trading floor or electronic trading or clearing platform (“direct and
indirect access suspensions”); and (2) suspensions of direct access
18
to the trading floor or electronic trading or clearing platform
(“direct access-only suspensions”).
21
Of the 63 suspensions issued
during the target period, 55 were direct and indirect access
suspensions, while eight were direct access-only suspensions.
Direct Access-Only Suspension Cases
The Exchanges stated that it imposes direct access-only
suspensions on a limited, case-by-case basis and offered the
following as examples of when the Exchanges have used direct
access-only suspensions: (1) the respondent’s violative conduct is
not related to the respondent’s supervisory responsibilities at a firm
or trading on behalf of a customer; and/or (2) the respondent is
solely responsible for executing customer orders and direct and
indirect access suspension would affect the respondent’s
customer’s ability to trade. The Exchanges have also asserted that
direct access-only suspensions would only be appropriate where the
violation is one that generally involves direct trading by a
respondent, and where it would be difficult, if not impossible, for
the respondent to engage in the violation via indirect trading.
The Division reviewed the seven cases that resulted in eight direct
access-only suspensions and found that MRD did not document or
explain how the facts and circumstances of these cases supported
the issuance of direct access-only suspensions, or the factors MRD
considered in determining the appropriate length of the direct
access-only suspensions. Without this supporting analysis, it is not
clear how the Exchanges value the penalty associated with a direct
access-only suspension. The Division believes the BCC needs this
information to ensure it issues sanctions that are commensurate
Recommendation
MRD should document and explain
each instance where it recommends
or supports the issuance of a direct
access-only suspension. Such
explanation should articulate the
specific facts and circumstances of
the case that support the issuance of a
21
In this context, trading indirectly would permit another individual, such as a broker or another authorized individual, to enter trades on behalf of the suspended
individual.
19
with the violation committed by the respondent. This information
will also help ensure that MRD and the BCC apply direct access-
only suspensions in a consistent manner. Finally, the information
may be relevant to the MROC as it reviews the adequacy of the
Exchanges’ disciplinary program and the BCC’s performance
under the Acceptable Practices for Core Principle 16.
22
Monitoring Suspended Individuals
Once the Exchanges issue suspensions, they largely rely on futures
commission merchants (“FCMs”) to ensure that suspended
individuals do not electronically access the Exchanges. The
Exchanges publicly disseminate notices of all disciplinary actions.
Therefore, all FCMs that are signed up to receive such notices are
notified if any of their customers have been suspended. The
Exchanges do not ensure that FCMs receive notices of all
disciplinary actions, nor do the Exchanges’ rules obligate FCMs to
restrict the access of suspended individuals or firms. The
Exchanges can conduct ad hoc queries of “Tag 50 IDs”
23
to
identify whether any Tag 50 IDs associated with suspended
individuals are trading. This is not routinely done, however, as the
Exchanges believe such monitoring would be of limited value
given that suspended individuals or firms would be more inclined
to attempt to access the Exchanges through a new Tag 50 ID.
The Division believes that the effectiveness of a sanction depends,
in part, on an exchange’s ability to adequately monitor and enforce
such sanction. For disciplinary fines and disgorgement and
restitution amounts ordered by the BCC, the Exchanges monitor to
how MRD determined the
appropriate length of the suspension
term.
Recommendation
The Exchanges should either monitor
22
The Exchanges have adopted the Acceptable Practice’s safe harbor requirements to comply with Core Principle 16, which provides that the ROC shall include
in its annual report a review the performance of an exchange’s disciplinary committees and panels.
23
A Tag 50 ID is a unique identifier of the individual or an Automated Trading System (“ATS”) that entered the order into CME Globex.
20
ensure that payment has been received by the date specified in the
notice of decision. Any respondent that fails to make such
payments forfeits direct and indirect access to the Exchanges until
payment has been received, and may also be subject to further
sanction under Rule 432.S.
24
The Exchanges do not monitor for
trading activity by suspended individuals, and therefore cannot
effectively enforce suspension bans.
Financial Condition of Respondents
In certain cases, Enforcement takes into account a respondent’s
financial condition in supporting a lesser financial penalty. To
demonstrate financial hardship, respondents must complete a
Statement of Financial Condition form detailing the respondent’s
assets, liabilities, and cash flow information, and expenses, as well
as provide financial statements, tax forms, and pay stubs.
As stated above, the Division found that fines imposed during the
target period were reasonable relative to the violations alleged and
the evidence presented, with the exception of five cases in which
Enforcement supported a lesser financial penalty due to a
respondent’s financial condition.
25
The Division reviewed these
five cases and found that while Enforcement noted that it
considered the respondent’s financial condition, it did not clearly
explain how it determined the appropriate sanction based on the
circumstances. It is difficult for the Division to ascertain whether
these sanctions are adequate and comparable to other sanctions
based on similar financial considerations without such information.
Similarly, the absence of such explanation may impact the
MROC’s ability to review adequacy of the Exchanges’ disciplinary
as trading by Tag 50 IDs that belong
to suspended individuals, or establish
a rule explicitly requiring FCMs to
monitor for such activity.
Recommendation
The Exchanges should document and
explain how it determines the
appropriate sanction where a
respondent’s financial condition
justifies a lesser financial penalty.
24
CBOT, CME, COMEX, and NYMEX Rule 444.
25
See discussion under Fines, Restitution and Disgorgement Levied During the Target Period.
21
program and the BCC’s performance under the Acceptable
Practices for Core Principle 16.
Warning Letter Cases
Warning letters may be issued from MRD, Enforcement, and at the
direction of the BCC. Pursuant to Rule 407, warning letters issued
upon the conclusion of an investigation “shall not constitute either
the finding of a Rule violation or a penalty,”
26
as the authority to
make findings on rule violations rests solely with the BCC.
27
Of
the 85 disciplinary cases reviewed by the Division, warning letters
were issued to 17 respondents in 12 cases. In addition to reviewing
those 12 cases, the Division selected for further review 10 cases,
28
four complaints, and 14 research files in which warning letters were
issued during the target period.
29
In total, the Division found that
in three cases, two complaints and one research file, the Exchanges
should have taken disciplinary action in lieu of issuing a warning
letter.
Wash Trades
In Case 12-9055, an FCM, acting on behalf of a customer, placed
orders with a floor broker to buy and sell 250 expiring Live Cattle
futures contracts, for purposes of freshening long futures position
26
CBOT, CME, COMEX, and NYMEX Rule 407.
27
CBOT, CME, COMEX, and NYMEX Rule 402.A.
28
In nine of the 10 cases, warning letters were issued by MRD and did not result in referral to Enforcement. One case was referred to Enforcement and resulted
in a warning letter.
29
Cases are matters for which the Exchanges determined a reasonable indication of potential rule violations existed at the time the matters are initiated;
complaints are matters initiated via a customer complaint; and research files are matters for which the Exchanges determined further review was merited.
22
dates and delaying delivery. The Executive Vice President
(“EVP”) and Principal
30
stated to the customer that the method by
which he could freshen the positions was a “grey area.” In
addition, another employee at the FCM manually overrode the
default settings of the FCM’s back office processing system in
order to facilitate the transactions. Although Enforcement
conceded that the EVP knew or should have known that that the
Exchanges prohibit wash trading for the purpose of freshening
positions, Enforcement nonetheless believed that the violation was
a systemic failure by the firm and not solely by the EVP, as it
related to training, education, and knowledge of Exchange rules.
Enforcement was also concerned that taking disciplinary action
against the EVP would amount to “double-dipping.” Accordingly,
the Exchange fined the firm $70,000 for violating Rules 432.W
(Failure to Diligently Supervise), 534 (Wash Trades Prohibited),
and 807 (Open Long Positions During Delivery Month); fined the
broker who executed the trades $20,000 and imposed a 10 day
direct access-only suspension for violating Rule 534; and issued the
EVP a warning letter in connection with Rule 534.
In Case 15-0127, an IB entered a series of orders on behalf of his
customers that resulted in self-matched trades for five accounts.
The subject trades were executed on December 22, 2014, for 55
contracts of the August 2015 Feeder Cattle futures, and were
executed to realize gains. Although MRD determined that the IB
should have known the activity in question violated Rule 534, it
nonetheless issued a warning letter. MRD concluded that the
length of time the orders were sitting, which was less than 20
seconds, demonstrated that it was not the IB’s intent to immediately
offset the trades. MRD also considered that the subject activity
was an isolated incident and that the IB did not have a disciplinary
30
The introducing broker (“IB”) was registered with NFA as an associated person.
23
history.
In RSRH 15-3541, an ATS malfunction resulted in self-matched
trades for a total of 3,448 contracts. The FCM stated that the ATS
was not configured to send the appropriate Self-Match Prevention
Identifier
31
on each order message. Although the firm operating
the ATS identified the issue after the self-match activity occurred,
it did not implement a fix for four days. MRD issued a warning
letter in connection with Rules 534 and 576 (Identification of
Globex Terminal Operators), and the associated Market Regulation
Advisory Notices (“MRANs”). In issuing a warning letter, MRD
considered that the firm had an adequate system for detecting and
rectifying ATS malfunctions.
The Division believes the conduct at issue in these warning letters
warranted disciplinary action. Wash trades affect market integrity
by creating an illusion of legitimate, bona fide market interest.
Such conduct may erode the public’s confidence in the futures
market. These concerns, together with the facts and circumstances
of each case, lead the Division to believe that warning letters issued
in the above-mentioned cases were not commensurate with the
violations committed. The EVP in Case 12-9055 knew, or should
have known, that the wash trades he was facilitating were
inappropriate. To mitigate concerns of “double-dipping,” the
Exchanges could have taken action against both the firm and the
EVP, in proportion to the rule violations they committed. In Case
15-0127, the Division believes that the IB, who is registered with
the National Futures Association (“NFA”), should have known that
his orders would result in self-trades given that the trades were in
an illiquid market and in the back-months contracts, and exposed to
the market for less than 20 seconds. In RSRH 15-3541, the
31
CME Group offers optional functionality that allows an executing firm to prevent the matching of orders for accounts with common ownership if both the buy
and sell orders contain the same Self-Match Prevention Identifier and Executing Firm ID.
24
Division is concerned that the individual(s) authorized to turn off
the ATS were not notified of the malfunction for three days after
the self-match activity occurred, and did not implement a fix for
four days after the malfunction. Additionally, because some of the
trading activity occurred in back-year contracts, the wash trades
that resulted from the ATS malfunction accounted for almost a
quarter of the trading in those contracts on a given day—a
significant amount of wash volume.
Disruptive Trading and Spoofing
Complaint 16-2463 originated as a complaint regarding an
individual who entered and cancelled 13 50-lot orders in the CBOT
March 2016 Wheat futures contract during the pre-open sessions
priced lower than the prevailing Indicative Opening Price (“IOP”)
on two trade dates. On one of these dates, the respondent’s trading
activity resulted in numerous fluctuations in the IOP that were
transmitted to the entire trading community and prompted another
trader to issue a complaint with MRD. MRD found two additional
instances of similar activity in the March 2016 Corn futures market,
amounting to a total of eight 50-lot offers that were entered and
cancelled, resulting in changes in the IOP. The respondent
indicated to MRD that he did not intend to trade the orders, but
instead hoped to discern other participants’ automated trading
strategies. MRD issued a warning letter for Rule 575 (Disruptive
Practices Prohibited) and the associated MRAN, based on (a) the
brief and isolated nature of these incidents; (b) that no similar
activity was identified; and (c) that the activity ceased once the
Exchange reached out to the respondent.
Case 14-9934, involved a respondent who entered 250 30-lot orders
(“large orders”) in the March 2014 Copper futures contract. Over
the course of seven days, the respondent fully cancelled 100
25
percent of his large orders. The individual also entered 4,840 small
orders (under 30-lot), and cancelled 82.93 percent of these orders.
The purpose of cancelling these orders was to obtain fills on his
small orders resting on the other side of the order book. The
respondent openly admitted to MRD that he had engaged in 14
instances of spoofing activity, but stated that he was not aware at
the time that such activity was prohibited. The respondent ceased
this trading activity once his clearing firm asked him to terminate
the spoofing trading behavior. MRD issued a warning letter for
Rules 432.B2 (General Offenses)
32
and 575 because the subject
trading activity comprised only 5.4 percent of the respondent’s
large orders and 1.12 percent of the respondent’s total traded
contracts, and that the spoofing pattern took place sporadically over
a two-month period.
Complaint 15-2353 originated as a complaint regarding an
individual who entered 46 orders of 100 contracts or greater in the
October 2015 Reformulated Blendstock for Oxygenate Blending
(“RBOB”) Gasoline futures market, and subsequently cancelled all
46 orders. Smaller orders resting on the opposite side of the market
traded as a result of the cancellations. The respondent explained to
MRD that there was no reason or purpose for the order placement
other than he was “just playing around” and that the orders were
really not meant to be executed. MRD issued a warning letter for
Rule 575 on because the small number of contracts initially
involved, the activity occurred on a single date, and the respondent
ceased the trading activity once he was contacted.
The Division believes the conduct at issue in these warning letters
warranted disciplinary action. Disruptive trading and spoofing can
cause significant harm to the marketplace. Entering and canceling
orders in quick succession without the intent to trade creates a false
32
Rule 432.B.2 makes it an offense “to engage in conduct or proceedings inconsistent with just and equitable principles of trade.”
26
sense of supply and demand, which market participants may rely
upon when making trading decisions. Similarly, non-bona fide
order entry during the pre-open session may cause the IOP to
fluctuate and reflect artificial prices. These concerns, together with
the facts and circumstances of each case, lead the Division to
believe that warning letters issued in the above-mentioned cases
were not commensurate with the violations committed. In
particular, the Division does not necessarily agree with MRD that
the trading activity at issue Case 14-9934 and Complaint 15-2353
was de minimus. The Division is concerned that the respondents in
both cases knowingly entered non-bona fide orders and openly
admitted to such activity. The Division also does not necessarily
agree that the instances in Complaint 16-2463 were isolated given
that they occurred in two separate markets and affected 21 50-lot
orders.
The Division believes that disciplinary action in the above-
mentioned cases would have served as a deterrent not only to the
respondents, but also other market participants. Public notification
of disciplinary sanctions sends the message to other market
participants that such conduct will not be tolerated. Furthermore,
sanctions become part of a respondent’s public disciplinary history,
and must be taken into consideration in determining sanctions for
any future violative activity. The Exchanges failure to take
disciplinary action in the above-mentioned cases means that the
respondents’ misconduct will not be reflected in their public
disciplinary history.
Recommendation
The Exchanges should take
appropriate disciplinary action in lieu
of issuing a warning letter in future
cases that involve misconduct similar
to the cases that were identified by
the Division in this Report.
§ 38.711 Warning Letters
Where a rule violation is found to
have occurred, no more than one
warning letter may be issued per
rolling 12-month period for the same
The Exchanges maintain a warning letter policy prohibiting the
issuance of more than one warning letter per rolling 12-month
period for the same violation. Of the 85 cases reviewed by the
Division, the Enforcement Group issued a total of 17 warning
letters in 12 cases. None of the warning letter recipients received
27
violation.
more than one warning letter during the target period for the same
violation.
§ 38.712 Additional Sources
for Compliance
Applicants and designated contract
markets may refer to the guidance in
appendix B of this part to
demonstrate to the Commission
compliance with the requirements of
§38.700 of this part.
The Division notes that the Exchanges’ rules provide, among other
things, that:
• Any charge in the notice of charges not denied in whole or
in part shall be deemed admitted by the BCC.
33
• The BCC shall have the authority to take emergency
actions.
34
• MRD may issue summary fines that shall not be less than
$1,000 per offense and shall not exceed $5,000 per offense
for individuals or $10,000 per offense for firms for the
inaccurate, incomplete or untimely submission of data,
records or information.
35
Documentation of Settlement Offers Rejected by the BCC
During the target period, the Exchanges permitted respondents to
submit settlement offers that were supported by the Enforcement
Group (“supported settlements”) as well as settlement offers that
were not supported by the Enforcement Group (“unsupported
settlements”).
36
Respondents were permitted to submit supported
settlement offers any time prior to a hearing and were not limited to
the number of offers that could be submitted, whereas only one
33
CBOT, CME, COMEX, and NYMEX Rule 407.C.
34
CBOT, CME, COMEX, and NYMEX Rule 402.C.
35
CBOT, CME, COMEX, and NYMEX Rule 512.B.
36
As of December 14, 2016, the Exchanges eliminated the use of unsupported settlement offers.
28
unsupported settlement offer was permitted to be presented after
the PCC had issued charges.
Prior to the settlement hearing for either a supported or
unsupported settlement offer, the Enforcement Group prepares and
distributes to the BCC panel a “BCC Hearing Packet,” which
includes the settlement offer, a list of comparable cases, and a draft
of the Notice of Disciplinary Action. BCC Hearing Packets for
supported settlements also include a memorandum in support of the
settlement offer (“MRD Supporting Memo”) which outlines trading
activity at issue, findings from the investigation, the respondent’s
disciplinary history, and the factors that the Enforcement Group
considered in recommending settlement. BCC Hearing Packets for
unsupported settlements include a memorandum in opposition of
the settlement offer (“MRD Opposition Memo”) which outlines the
factors for MRD’s opposition to the settlement offer, as well as
copies of the charging memorandum and the respondent’s answer
to the charges.
The Exchanges maintain minutes for each BCC meeting. These
minutes include the date, time and location of the hearing, a list of
cases on the agenda, and a list of the BCC members and MRD staff
present. For each case listed on the agenda, the minutes indicate
whether a settlement offer was accepted by the BCC. The minutes
do not capture any additional detail regarding the BCC’s decision
to accept or reject the settlement offer. For settlement offers that
are accepted by the BCC, the Panel’s rationale for accepting the
offer is based on the factors set forth in the MRD Supporting
Memo, and is therefore documented. However, if the BCC decides
to reject a settlement offer recommended by Enforcement, the
rationale for this decision is not documented anywhere in the case
file, either while the matter is pending or once it has been resolved,
by either Enforcement or the BCC.
29
The Exchanges assert that Enforcement staff can often surmise the
BCC’s reasons for rejecting the settlement offer based on the types
of questions raised by at the hearing. While such dialog at the
hearing may provide Enforcement staff some insight into the
BCC’s decision-making, there may be additional factors raised
during the BCC’s deliberation to which Enforcement staff is not
privy. Therefore, the Division believes that documenting the
BCC’s basis for rejecting a supported settlement offer is necessary
to ensure that the Enforcement Group clearly understands all the
factors that formed the basis of the BCC’s decision, and can use
this insight when recommending settlement offers involving similar
facts and circumstances. Documenting this information will also
promote consistency among disciplinary panels, since the views of
each BCC panel may differ based on the views of the individual
members. Finally, such documentation is necessary to ensure that
the MROC has the information to review the adequacy of the
Exchanges disciplinary program and the BCC’s performance under
the Acceptable Practices for Core Principle 16.
The Exchanges should ensure that
the BCC’s rationale for rejecting a
settlement offer is documented. Such
documentation may be completed
once the matter has been resolved
and after the appeal period for the
matter has lapsed.