CFTC DMO RULE ENFORCEMENT REVIEWS ISSUED FOR CBOT, COMEX, CME, NYME

FROM:  U.S.COMMODITY FUTURES TRADING COMMISSION 
November 24, 2014

CFTC DMO Issues Rule Enforcement Reviews of the Chicago Board of Trade, Chicago Mercantile Exchange, Commodity Exchange, Inc. and New York Mercantile Exchange, Inc.

Washington, DC — The U.S. Commodity Futures Trading Commission’s Division of Market Oversight (Division) today issued three separate rule enforcement reviews of certain Designated Contract Markets (DCMs).

The Division’s reviews assessed compliance with Commodity Exchange Act Core Principles for DCMs and related regulations with respect to: (1) the Chicago Board of Trade (CBOT) and Chicago Mercantile Exchange (CME) audit trail program; (2) the New York Mercantile Exchange (NYMEX) and Commodity Exchange (COMEX) trade practice surveillance program; and (3) the CBOT, CME, COMEX, and NYMEX (collectively, the Exchanges) disciplinary program.

Overall, the Division found the Exchanges’ respective programs to be generally in compliance with the assessed DCM core principles and Commission regulations. However, the Division’s reviews identified certain deficiencies – areas where an exchange is not in compliance with a Commission regulation and must take corrective action, and recommendations – areas where an exchange should improve its compliance program. The deficiencies and recommendations identified in the reviews are summarized below.

CBOT and CME Audit Trail Program

Deficiencies:

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must ensure that their program for reviewing front-end audit trail data is effective and the reviews are conducted in a timely manner.

• As required by Commission regulation § 38.553(a)(1), CBOT and CME must develop a program to at least annually review and enforce the assignment process of user IDs to automated trading models, algorithms, programs, and system in order to enforce the CBOT and CME’s user ID (Tag 50) policy.

• As required by Commission regulation § 38.553(b), CBOT and CME must ensure that the minimum summary fine amount for electronic trading audit trail deficiencies on each exchange is “meaningful” and “sufficient to deter recidivist behavior.” This minimum summary fine amount should be published in the Exchanges’ rules.

NYMEX and COMEX Trade Practice Surveillance Program

Deficiency:

• As required by Commission regulation § 38.158(b), NYMEX and COMEX must complete investigations in one year or less, absent mitigating circumstances.

Recommendations:

• NYMEX and COMEX should implement a system which would enable Market Regulation staff to efficiently track connections between related trade practice matters (complaints, research files, and cases) and thereby identify the source of time delays.

• NYMEX and COMEX should continue to develop strategies to detect spoofing.

• NYMEX and COMEX should reduce the time they take to complete pre-investigative trade practice matters (research files and complaints).

CBOT, CME, COMEX, and NYMEX Disciplinary Program

Deficiency:

• As required by Commission regulation § 38.701, the Exchanges must maintain sufficient enforcement staff to promptly prosecute possible rule violations.

Recommendation:

• The Exchanges should take appropriate measures to ensure that internal deliberations do not interfere with the prompt resolution of disciplinary matters.

Copies of the reports are available from the Commission’s Office of Public Affairs, Three Lafayette Centre, 1155 21st Street N.W., Washington, DC 20581, 202-418-5080, or by accessing the Commission’s website at www.cftc.gov.

Last Updated: November 24, 2014

CFTC FILES AMENDED COMPLAINT ADDING DEFENDANT IN NYMEX CASE

FROM: COMMODITY FUTURES TRADING COMMISSION

CFTC Charges Ron Eibschutz with Aiding and Abetting Disclosures of Material Nonpublic Information about Customer Trades in its Case against the CME Group’s New York Mercantile Exchange and Two Former Employees

Washington, DC – The U.S. Commodity Futures Trading Commission (CFTC) today filed an amended Complaint in its pending enforcement action, U.S. Commodity Futures Trading Commission v. William Byrnes, et al. (U.S. District Court, Southern District of New York, 13 CIV 1174), naming Ron Eibschutz as a Defendant in its ongoing case against the New York Mercantile Exchange, Inc. (CME NYMEX), and two former CME NYMEX employees, William Byrnes and Christopher Curtin.

The amended Complaint charges CME NYMEX, Byrnes, and Curtin with violating the Commodity Exchange Act (CEA) and CFTC Regulations through the repeated disclosures during a two and one-half year period of material nonpublic customer information to Eibschutz, an outside commodity broker who was not authorized to receive the information, and charges Eibschutz with aiding and abetting the violations.

The CFTC’s amended Complaint alleges, as did the initial complaint, that at least from in or about February 2008 to September 2010, Byrnes knowingly and willfully disclosed material nonpublic information about CME NYMEX trading and customers, including about trades cleared through CME ClearPort, to Eibschutz on at least 60 occasions, and that between May 2008 and March 2009, Curtin knowingly and willfully disclosed the same type of information to Eibschutz on at least 16 additional occasions. The nonpublic customer information unlawfully disclosed by Byrnes and Curtin, in conversations often captured on tape, included details of recently executed trades, the identities of the parties to specific trades, the brokers involved in trades, the number of contracts traded, the prices paid, the structure of particular transactions, and the trading strategies of market participants, according to the amended Complaint.

The amended Complaint alleges that Eibschutz aided and abetted the violations of the CEA and CFTC Regulations, including by, among other things, repeatedly soliciting Byrnes and Curtin for the specific material nonpublic information they disclosed to him and providing them with information they needed to identify and locate information about the specific trades in which Eibschutz was interested.

In its continuing litigation, the CFTC seeks civil monetary penalties, trading and registration bans, and a permanent injunction prohibiting further violations of the federal commodities laws, as charged.

CFTC Division of Enforcement staff responsible for this case include Patrick Daly, James Wheaton, David W. MacGregor, Lenel Hickson, Stephen J. Obie, and Vincent A. McGonagle

COURT ORDERS TRADER ON CME TO PAY NEARLY $2.5 MILLION IN PENALTIES AND RESTITUTION

The following excerpt is from the CFTC website: “Washington, DC - The U.S. Commodity Futures Trading Commission (CFTC) announced today that the U.S. District Court for the Northern District of Illinois entered a final default judgment on May 5, 2011, against defendant Carmine Garofalo, an Italian national who purports to reside in Tunisia, requiring him pay $614,925 in restitution and a $1,844,775 civil monetary penalty. The CFTC charged Garofalo with fraud and noncompetitive trading in connection with transactions executed on the Chicago Mercantile Exchange (CME) in March 2010 (see CFTC Press Release 5813-10, April 22, 2010). On August 16, 2011, the court entered a distribution order requiring that funds previously frozen in a personal account held by Garofalo at Interactive Brokers LLC be used to pay restitution and a portion of Garofalo’s civil monetary penalty. The court’s order requires that full restitution of $614,925 be paid to the victim of Garofalo’s fraudulent transactions. The court’s final judgment order finds that Garofalo simultaneously entered trades for his account at Interactive Brokers LLC and an account held at an Italian bank on behalf of a Luxembourg-based client. Garofalo intentionally executed parallel orders to buy and sell E-mini S&P 500 options and Euro/U.S. Dollar European Style Premium options during after-hours trading on the March 5, 2010 trading day -- a period of low volume options trading -- with the purpose of having the opposite orders find and match each other on the CME’s Globex trading platform, the order finds. According to the order, during a 5-hour period on the March 5, 2010 trading day, Garofalo fraudulently executed 168 trades in the account of the client and was successful in matching 119 of the orders with orders placed in his personal account, resulting in a money pass. The CFTC thanks the CME Group, the Italian Commissione Nazionale per le Società e la Borsa, and the U.S. Consulate in Milan, Italy, for their assistance.”