By Alexandra Alper and Jonathan Leff
WASHINGTON, Sept 27 U.S. regulators punished two more firms for excessive speculation in cotton markets during one of the most tumultuous periods in the contract's history, tagging JP Morgan and Australia and New Zealand Banking Group Ltd Bank with fines totaling nearly $1 million.
In the latest sign that the U.S. Commodity Futures Trading Commission is cracking down on trading limits in futures markets, JP Morgan agreed to pay $600,000 for exceeding position limits in the cotton market in September and October 2010, one of the agency's largest civil penalties ever for position limits violations.
Earlier in the day it said Australia and New Zealand Banking Group Ltd would pay $350,000 for exceeding limits in the CME Group's Chicago Board of Trade wheat futures contract on multiple occasions in August 2010, and in IntercontentalExchange cotton futures in February 2011.
"These breaches of CFTC regulations were inadvertent, technical in nature and confined to a small number of transactions. However, ensuring we are compliant with regulations is a key priority in every part of ANZ," ANZ Chief Risk Officer Nigel Williams said in a statement.
JPMorgan declined to comment.
Coupled with two previous settlements over the past week and one in February, the CFTC has collected more than $2 million in five civil fines related to position limits this year.
Prior to the summer of 2010, when the Dodd-Frank financial reforms set in motion new rules that would expand federal trading limits to all commodity markets, the CFTC had only issued five fines since 1995, according to a Reuters review of enforcement actions on the agency's website.
For a FACTBOX on past fines see:
The JPMorgan order is the latest in a flurry of position limits settlements announced by the CFTC in the lead-up to the Oct. 12 effective date for new caps on the number of contracts that traders can hold in certain markets.
They are also the second and third penalties related to a particularly volatile period in the cotton market, which surged more than three-fold from August 2010 to March 2011 -- and then more than halved in five months.
On Tuesday, the CFTC said Sheenson Investments Ltd, a little-known Shanghai, China-based firm, and its founder Weidong Ge had agreed to return $1 million in ill-gotten gains and pay a $500,000 civil penalty for exceeding federal limits on speculative bets in soybean oil and cotton futures. For a story see:
Cotton traders say some companies may have inadvertently exceeded their limits during this period because of the extraordinary volatility of the market, as well as the difficulty of managing complex options positions.
But cotton is not the only market facing heightened scrutiny.
Last Friday, the agency ordered Citigroup Inc and a subsidiary to pay $525,000 for violating limits in the wheat market.
The settlements come before a new set of trading curbs kicks in Oct. 12. The rules, which aim to rein in speculation and limit price spikes, were included in the 2010 Dodd-Frank financial reform law and finalized by the agency last October. Additional caps are expected to kick in next year.
Financial industry groups have sued to stop the new position-limit rules from taking effect, saying they would irreparably harm the marketplace and that the CFTC failed to sufficiently weigh the economic consequences of the rule, as is required by law.
Traders and some Republican lawmakers have argued there is no evidence that speculators inflate prices.
A judge has not yet ruled in the case, which was filed by the Securities Industry and Financial Markets Association and the International Swaps and Derivatives Association in December.