CME Group fines traders for transactions that worried regulator

CHICAGO Mon Feb 24, 2014 5:15pm EST

CHICAGO Feb 24 (Reuters) - CME Group Inc, the largest U.S. futures exchange operator, on Monday announced fines against nine traders and clearing members for violating rules governing a type of transaction that U.S. regulators expressed concerns about last year.

CME, owner of the Chicago Mercantile Exchange and New York Mercantile Exchange and others, took action against a range of market participants for trades involving Exchange for Related Position transactions, or EFRPs.

The actions came after the U.S. Commodity Futures Trading Commission in August said CME's procedures for monitoring EFRP transactions were inadequate and required "significant and prompt improvement."

It was inevitable that CME "was going to feel obligated to crack down on EFRP transactions following its CFTC rule review," said Gary DeWaal, a consultant and former general counsel for broker Newedge.

"Now it has happened," he said in a note about the "plethora of EFRP fines."

A CME spokeswoman had no immediate comment.

Traders use EFRP to exchange an over-the-counter swap or a cash position into an equivalent futures contract. The exchange takes place away from the public marketplace and is reported to CME or CBOT once complete. Regulators want to make sure traders do not use the transactions to hide otherwise prohibited behavior.

CME fined Deutsche Bank AG $25,000 for failing to maintain required documents regarding EFRP transactions on three trade dates between Aug. 2012 and June 2013, according to a disciplinary notice. The bank, which did not admit to rule violations, was pleased to resolve the matter, a spokeswoman said.

CME fined Guardian International Gold Corp, a Toronto-based gold trader, $15,000 for improperly being on both sides of EFRP transactions on July 30, 2012 and for failing to maintain certain documents, according to a disciplinary notice.

"For us, it was a total Mickey Mouse, ridiculous thing that happened," Guardian International Gold President Dino Vannicola said about the violations. "We're a small company. Really it was just a technical error on a small deal."

The company negotiated the size of the fine with CME staff, Vannicola said. The employee responsible for the violations was fired, he added.

The CFTC last year said it was concerned that, from Nov. 1, 2010 to Oct. 31, 2011, CME staff had opened only 16 EFRP cases when nearly half a million transactions took place at the Chicago Mercantile Exchange and Chicago Board of Trade.

The commission in 2012 fined Morgan Stanley $5 million for misusing EFRPs over an 18-month period in 2008 and 2009 at the Chicago Mercantile Exchange and Chicago Board of Trade.