GEORGE E. WARREN CORPORATION
NYMEX RULE VIOLATION: EXCHANGE RULE 538. EXCHANGE FOR RELATED POSITIONS
The following transactions shall be permitted by arrangement between parties in accordance with the requirements of this rule: Exchange for Physical (“EFP”) – A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding cash position. Exchange for Risk (“EFR”) – A privately negotiated and simultaneous exchange of an Exchange futures position for a corresponding OTC swap or other OTC instrument. Exchange of Options for Options (“EOO”) – A privately negotiated and simultaneous exchange of an Exchange option position for a corresponding OTC option position or other OTC instrument with similar characteristics. For purposes of this rule, an EFP, EFR or EOO shall be referred to as an Exchange for Related Position (“EFRP”).
C. Related Position
The related position component of an EFRP must be the cash commodity underlying the Exchange contract or a by-product, a related product or an OTC derivative of such commodity underlying the Exchange contract or a by-product, a related product or an OTC derivative instrument of such commodity that has reasonable degree of price correlation to the commodity underlying the Exchange contract. The related position component of an EFRP may not be a futures contract or an option on a futures contract. Each EFRP requires a bona fide transfer of ownership of the underlying asset between the parties or a bona fide, legally binding contract between the parties consistent with relevant market conventions for the particular related position transaction.
The execution of an EFRP transaction may not be contingent upon the execution of another EFRP or related position transaction between the parties where the transaction result in the offset of the related position without the incurrence of market risk that is material in the context of the related position transactions.
EXCHANGE RULE 538.G. EFRPS FOLLOWING THE TERMINATION OF TRADING IN EXCHANGE CONTRACTS
EFRP transactions in certain Exchange contracts may be executed for a defined period of time following the termination of trading in accordance with the applicable product rules governing each Exchange contract. Such transactions may be executed only to liquidate Exchange positions.
191102.F. TERMINATION OF TRADING
No trades in RBOB Gasoline futures in the expiring contract month shall be made after the last business day of the month preceding the delivery month for such expiring contract. Any contracts remaining open after the last day trading must be either:
(a) Settled by delivery which shall begin no earlier than the day after the fifth business day of the delivery month or later than the last day prior to the last business day of the delivery month and shall be completed no later than the last business day of the delivery month; or
(b) Liquidated by means of a bona fide Exchange for Related Positions (“EFRP”) pursuant to Rule 538. An EFRP is permitted in an expired futures contract at any time before 2:00 p.m. on the first business day following termination of trading in the expired futures contract. An EFRP which establishes a futures position for either the buyer or the seller in an expired futures contract shall not be permitted following the termination of trading of an expired futures contract.
Pursuant to an offer of settlement George E. Warren Corporation (“GE Warren”) presented at a hearing on November 1, 2016, in which GE Warren neither admitted nor denied the findings or the rule violations upon which the penalty is based, a Panel of the NYMEX Business Conduct Committee (“Panel”) found it had jurisdiction over GE Warren pursuant to NYMEX Rules 400 and 402 and that, on October 1 2015, the day that trading in the expiring October 2015 RBOB Gasoline Futures (“OCT15 RB”) contract was terminated, GE Warren executed two non-bona fide EFRP transactions. The EFRP transactions were non-bona fide as they were contingent upon each other and were executed in a manner to avoid any material market risk associated with the EFRPs’ related position components.
Further, in executing the EFRPs, GE Warren established a new position of five OCT15 RB contracts following the termination of trading in the contract.
The Panel found that, as a result, GE Warren violated Exchange Rule 538.C. (EFRP – Related Position) and Exchange Rule 538.G. (EFRP - Termination of Trading).
In accordance with the settlement offer, the Panel ordered GE Warren to pay a fine to the Exchange in the amount of $20,000.