A Chicago-based futures commission merchant ("FCM") and its affiliate agreed to pay a civil monetary penalty to settle CFTC charges for executing illegal "exchange for related position" ("EFRP") transactions. The FCM is INTL FCStone Financial Inc. ("FCStone Financial") and the affiliate, which acted as a counterparty for the EFRPs at issue, is FCStone Merchant Services LLC ("FCStone Merchant").
As detailed in an Order, the CFTC found that FCStone Merchant entered into a series of exchange of futures for physical transactions ("EFPs") with a counterparty as part of a larger series of complex transactions executed to assist the counterparty with certain inventory storage costs. The transactions involved an exchange of Canadian Dollar futures and physical canola seed. As Canadian Dollar futures and canola seed are not related, the EFPs could not be designated as exchanges for related positions. Despite this fact, FCStone Merchant designated these trades as EFRPs and submitted the trade documentation and clearing information to FCStone Financial, which then proceeded to report non-bona fide Canadian Dollar futures trades to the Chicago Mercantile Exchange as valid EFRPs without confirming that the trades met EFRP requirements. In addition to charging the companies with violations for the noncompetitive trading and improper reporting, the CFTC determined that they also had inadequate supervisory systems and internal controls.
As a result of the alleged misconduct, the FCM and its affiliate were charged with violating CEA Sections 4c(a)(1) (prohibited transactions) and (2) and CFTC Rules 1.38 and 166.3 (execution of transactions and supervision, respectively). To settle the charges, the companies agreed to pay a $280,000 civil monetary penalty and enhance internal controls and supervisory policies and procedures.
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